How Do LLC Protections in New York Differ from Other States?

If a business owner is thinking of starting a business in New York and wants to limit their personal liability, odds are the LLC — short for limited liability company — caught their eye. But it’s important to know that LLC protections in New York are a little weaker than in some other states. The owners’ personal assets are generally protected, but business creditors have multiple options for pursuing compensation from the LLC’s members.

This article addresses some of the nuances of LLC protections in New York, including charging orders, foreclosures, how protections work for single-member LLCs, and more.

How do LLCs protect members’ assets in New York?

Limited liability companies are a popular choice among business owners due to their ability to separate personal and business liabilities. When a person forms an LLC, it becomes a distinct legal entity separate from its owners. This separation establishes a protective barrier (sometimes called the corporate veil), safeguarding the personal assets of LLC members from business debts and obligations. This asset protection is one of the primary benefits of an LLC.

The level of asset protection provided by an LLC can vary somewhat from state to state, and New York is a prime example of this. Compared to other states, New York’s LLC protections are a little weaker because there are a few different ways a creditor can pursue compensation from an LLC member instead of just one. That’s where charging orders come in.

See more: Benefits of an LLC in New York

What is a charging order?

A charging order is a legal tool that creditors can use to claim a debtor’s share of profits from an LLC. In many states, it’s the only option for creditors to get payment. However, in New York, creditors have additional options beyond just a charging order. They can foreclose on an LLC member’s membership interest, allowing them to access the debtor’s assets held within the LLC. This doesn’t give the creditor any management rights within the LLC, so the other members can, in theory, still operate as they please. 

However, creditors in New York can further petition the court to dissolve the LLC and sell its assets to satisfy the debt. It’s worth noting that both foreclosure and dissolution procedures are complex and time-consuming, which make them less attractive options for creditors. Some creditors would rather patiently obtain repayment over time through the charging order.

Do single-member LLCs have less protection in New York?

While some states provide lesser protections for single-member LLCs due to the absence of other members and how they would be affected, New York treats both single-member and multi-member LLCs equally (see multi-member LLCs definition); protections don’t differ based on the number of owners. In contrast, states like Florida and New Hampshire have opted to grant fewer protections to single-member LLCs. Thus, if an individual is forming a single-member LLC in New York, they should have at least as much protection as a multi-member LLC.

Foreign LLCs

For entrepreneurs primarily concerned with personal asset protection, forming an LLC in a state that offers stronger protections may be an option. A business owner could establish an LLC in one of those states and then conduct business in New York as a foreign LLC. In 15 states, the sole recourse for creditors is a charging order, limiting their ability to access the owner’s personal assets. 

However, it’s important to note that operating as a foreign LLC involves additional costs and paperwork. Additionally, it’s crucial to consult an attorney to help ensure that the asset protections provided by the formation state extend to the operations in New York.