ARIZONA LLCS: PERSONAL LIABILITY PROTECTION AND CHARGING ORDERS
One of the primary reasons business owners form an LCC is to protect their personal assets from the liabilities of the business. However, a membership interest in an LLC also provides some protection against the LLC owner’s personal debt liabilities. In most states, including Arizona, the money or property of an Arizona limited liability company (“LLC”) cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners.
Arizona’s Charging Order Law:
In some states, creditors are allowed to take an LLC owner’s (LLC owners are called “Members”) interest in the company and may even be able to petition the court to have an LLC dissolved and its assets sold to pay the member’s debt to the creditor. However, under Arizona’s charging order statute (ARS §29-655), the charging order is generally the only legal remedy that creditors of a member of an Arizona LLC can use against the member’s LLC interest. 
Arizona does not allow creditors to foreclose on a member’s interest in the LLC, nor can the creditors easily get a court to dissolve the LLC in order to sell its assets. This makes Arizona a more friendly state for people who want to form LLCs to protect their assets. Creditors of Arizona LLC members can obtain a charging order with respect to the LLC member’s interest in the company, which only gives the creditor the right to obtain distributions that are voluntarily taken by the member from the LLC. Importantly, creditors cannot take part in managing the LLC and cannot order the LLC to make a distribution to the member.
Because they can’t force the LLC member to take any distributions, creditors who obtain charging orders may end up with nothing. In that sense, charging orders do not seem to offer an effective collection tool for creditors. On the other hand, if the member wants to avoid paying the creditor, the member can’t receive any distributions. This often creates an impasse between creditor and debtor ultimately leading to payment and/or good faith negotiations to settle the debt.
The Charging Orders Limitation May be Less Certain in Single-Member Arizona LLC’s:
The primary purpose of the creditor limitations imposed by state charging order laws is to protect other owners of an LLC from the creditors of their co-owner. It would be unfair to the other members if your creditor were allowed take over your LLC interest and have any control over the business decisions for the LLC. By making a charging order the exclusive remedy, personal creditors may not take over the member’s LLC interest and they cannot compel the LLC’s dissolution to sell its assets.
In some states, if an LLC has only one member, the charging order statute does not apply because there are no other members to protect. In those states the personal creditor of the sole owner of an LLC has the ability to foreclose on the member’s LLC interest, force a distribution of assets to the creditor or the dissolution of the LLC and the sale of all of its assets to satisfy the owner’s debt.
Arizona’s LLC law does not distinguish between multi-member and single-member LLCs. Arizona restricts creditors of single member LLCs to the charging order remedy. However, there is always a possibility that the law may change. Therefore, owners of single member LLC’s should still exercise caution, especially if your business enters into contracts with companies located outside of Arizona. If you sign a contract with a company formed in another state and the contract you sign dictates that the other state’s laws will apply with respect to that contract, you may find yourself in a situation in which your LLC interest is not protected by Arizona’s charging order law.
This is why careful attention to your contracts are extremely important and why you should have an Arizona attorney review any contract presented to you for signature if you aren’t certain about whether there are provisions might adversely affect you and your business.
 This does not apply in situations with respect to property that was transferred to the LLC after the member personally obtained a secured loan on the property. Consider the following example: Bob decides to start a printing business and forms an LLC. The LLC is brand new and has no credit or payment history so Bob must finance the purchase of the large printers and other equipment he’ll need in his own name. The printer manufacturer will finance the purchase, but will require that Bob sign a secured financing agreement giving the manufacturer the right to repossess the equipment if Bob defaults in his payment obligations.
Shortly thereafter, assume that for bookkeeping and tax purposes, Bob assigns the ownership of the printer to the LLC and the LLC continues to make payments on the equipment. This bookkeeping transfer to the LLC, however, does not relieve Bob of his personal responsibility for the debt to be paid to the manufacturer and it does not prevent the manufacturer from repossessing the equipment if the debt is not paid according to the terms of the financing agreement.
However, if the value of the equipment at the time of repossession is insufficient to cover the remaining debt, the manufacturer may have a right to sue Bob for the deficiency. If the manufacturer does sue Bob and gets a judgment against him for that deficiency amount, Arizona’s charging order law will kick in and the manufacturer can only get at distributions voluntarily taken by Bob.
Back to Helpful Articles and Information page