Asset protection through limited liability companies depends heavily on state law, and not all states treat single-member LLCs the same as multi-member LLCs. Wyoming stands out as one of the few states that provides charging order protection as the exclusive remedy even when an LLC has only one member. This distinction makes Wyoming single member LLC asset protection significantly stronger than what most other states offer.
The Charging Order Protection Difference
The charging order is the mechanism that protects LLC assets from a member’s personal creditors. When a creditor obtains a judgment against someone who owns an LLC membership interest, the creditor cannot simply seize the LLC’s assets or force the LLC to liquidate. Instead, the creditor’s remedy is limited to a charging order, which is a lien on the debtor’s right to receive distributions from the LLC.
Under a charging order, the creditor receives whatever distributions the LLC would have made to the debtor-member. However, the creditor does not become a member, cannot vote on LLC matters, cannot force distributions, and cannot access the LLC’s underlying assets directly. If the LLC makes no distributions, the creditor receives nothing despite holding the charging order.
This protection exists because LLCs are designed to prevent unwanted third parties from becoming members. Allowing a creditor to step into the shoes of a member would disrupt the business arrangements among the existing members. The charging order balances creditors’ rights against the legitimate interests of non-debtor members.
The Single-Member Problem in Most States
Many states provide charging order protection only for multi-member LLCs. The reasoning is that charging order protection exists to protect innocent co-members from having an unwanted creditor forced upon them. When there are no other members to protect, this rationale disappears.
The Florida case Olmstead v. FTC (2010) illustrated this problem dramatically. The Florida Supreme Court held that judgment creditors of a single-member LLC owner could order a judicial sale of the debtor’s membership interest, effectively giving the creditor ownership of the LLC and access to its assets. The charging order was not the exclusive remedy.
Following Olmstead, creditors in many states have successfully argued that single-member LLCs deserve less protection than multi-member LLCs. Courts in these states have allowed creditors to foreclose on membership interests, appoint receivers, or even dissolve LLCs to reach the assets inside.
This creates a significant gap in asset protection for the many business owners and investors who operate through single-member LLCs. The protection they thought they had may not exist when tested in court.
Wyoming’s Exclusive Remedy Statute
Wyoming addressed this issue directly in its LLC statute. Wyoming Statute Section 17-29-503(c) provides that a charging order is the exclusive remedy by which a judgment creditor of a member may satisfy a judgment out of the judgment debtor’s transferable interest in a limited liability company.
The statute does not distinguish between single-member and multi-member LLCs. The charging order is the exclusive remedy regardless of how many members the LLC has. This means a creditor of a Wyoming single-member LLC owner cannot foreclose on the membership interest, cannot obtain a court order for the LLC to be sold or dissolved, and cannot become a member of the LLC.
The practical effect is substantial. A creditor holding a charging order against a single-member Wyoming LLC has no direct access to the LLC’s assets. If the LLC does not make distributions, the creditor receives nothing. The creditor may hold the charging order indefinitely, watching the LLC’s assets appreciate without receiving any payment.
This creates significant negotiating leverage for the LLC owner. Creditors often prefer to settle for a fraction of the judgment amount rather than wait indefinitely for distributions that may never come.
Phantom Income as a Deterrent
An additional feature of charging order protection involves taxation. When an LLC is taxed as a disregarded entity or partnership, income flows through to the member for tax purposes regardless of whether distributions are made. Some courts have held that when a charging order is in place, the creditor becomes the assignee of the member’s economic interest and must report their share of the LLC’s taxable income.
This creates what is sometimes called phantom income for the creditor. The creditor may owe taxes on income they never actually received if the LLC has profits but makes no distributions. This tax consequence further discourages creditors from pursuing charging orders as a collection remedy.
Wyoming’s treatment of single-member LLCs enhances this effect. Because the charging order is the exclusive remedy, the creditor cannot escape the phantom income problem by foreclosing on the interest and taking control of the LLC.
Comparison with Other States
Only a handful of states explicitly provide charging order protection as the exclusive remedy for single-member LLCs.
Nevada, like Wyoming, provides strong protection for single-member LLCs. Nevada Revised Statute Section 86.401 makes the charging order the sole and exclusive remedy against a member’s interest, regardless of the number of members.
Delaware provides good but not identical protection. Delaware courts have generally protected single-member LLCs, though the statute is less explicit than Wyoming’s or Nevada’s.
Texas amended its statute in 2023 to clarify that charging order protection applies to single-member LLCs after earlier uncertainty.
Many other states either provide weaker protection for single-member LLCs or have not addressed the issue clearly, leaving the question to be resolved in litigation.
For clients in states with weak single-member LLC protection, forming a Wyoming LLC to hold assets provides access to Wyoming’s stronger statutory framework.
How Wyoming Protection Works in Practice
Understanding how Wyoming single-member LLC asset protection functions in practice helps illustrate its value.
Consider an investor who owns a Wyoming LLC that holds a $2 million investment portfolio. The investor is sued personally for an unrelated matter and a $500,000 judgment is entered. The creditor now attempts to collect.
In a state without single-member protection, the creditor might obtain a court order forcing the sale of the LLC membership interest or even dissolving the LLC to access the portfolio. The investor loses the assets.
In Wyoming, the creditor can only obtain a charging order. The LLC makes no distributions, so the creditor receives nothing. The creditor may attempt to force distributions, but Wyoming law does not allow this. The LLC continues holding and managing the portfolio while the creditor waits.
The creditor faces an unpleasant choice: wait indefinitely for distributions that may never come, or negotiate a settlement for less than the judgment amount. The LLC owner has leverage to settle on favorable terms.
Limitations of Charging Order Protection
While strong, Wyoming’s charging order protection is not absolute.
Fraudulent transfer law still applies. Transferring assets to an LLC after a claim arises or when insolvent can be challenged as a fraudulent conveyance. Courts can reverse the transfer and impose penalties. Asset protection planning must be done before any claim exists.
The LLC must be properly formed and maintained. If the LLC is treated as the owner’s alter ego because of commingled funds, failure to observe formalities, or inadequate capitalization, courts may pierce the liability veil and allow creditors direct access to LLC assets.
Federal claims may receive different treatment. Federal tax liens and certain other federal claims may not be subject to state charging order limitations in the same way private creditors are.
Bankruptcy presents additional considerations. Federal bankruptcy law allows trustees to use various powers that may not be constrained by state charging order protections.
The protection applies to the member’s personal creditors, not to creditors of the LLC itself. If the LLC incurs its own liabilities through contracts or torts, those creditors can pursue the LLC’s assets directly.
Structuring for Maximum Protection
Several strategies can enhance Wyoming single-member LLC asset protection.
Adding a second member eliminates any argument that single-member protection should not apply. Even a small minority interest held by a spouse, family member, or irrevocable trust creates a multi-member structure. However, this adds complexity and may create other issues.
Having a trust own the LLC membership interest adds a layer of protection. A Wyoming domestic asset protection trust that owns the LLC creates two barriers for creditors: the trust’s spendthrift provisions and the LLC’s charging order protection.
Drafting the Operating Agreement carefully enhances protection. Provisions that eliminate mandatory distributions, include transfer restrictions, waive partition rights, and exclude creditors from management rights strengthen the structure.
Maintaining proper LLC formalities prevents veil piercing arguments. Keep separate bank accounts, document major decisions, file annual reports, and treat the LLC as a legitimate separate entity.
Choosing Wyoming for a Single-Member LLC
Residents of other states can form Wyoming LLCs to take advantage of Wyoming’s protective statutes. No Wyoming residency is required.
Wyoming offers several advantages beyond single-member charging order protection. The state has no state income tax, maintaining costs are low with minimal annual fees, privacy is protected because members and managers are not disclosed in public filings, and the overall business-friendly environment includes a well-developed body of LLC law.
When a non-Wyoming resident forms a Wyoming LLC, choice of law provisions in the Operating Agreement should specify that Wyoming law governs. Assets should have genuine connections to Wyoming through the registered agent, bank accounts, or other administrative contacts. The stronger the Wyoming nexus, the more likely courts will apply Wyoming law if a dispute arises.
Conclusion
Wyoming single member LLC asset protection is among the strongest available in the United States because Wyoming statute makes the charging order the exclusive remedy even for single-member LLCs. This protection creates significant obstacles for personal creditors attempting to reach LLC assets and provides leverage for settlement negotiations.
For guidance on structuring a Wyoming single-member LLC for maximum asset protection, consider consulting Mark Pierce and Matt Meuli at Wyoming Trust Attorney.