Tax Law and Business Organization Strategy

Changes in Charging Orders for Texas Entities

The Texas legislature, in its most  recently ended regular session, made many changes to the Texas Business Organizations Code (BOC) and to the old Texas statutes that were codified to become the BOC. Those changes became effective September 1, 2007 and were, for the most part, technical in nature. Among the substantive changes adopted were new provisions regarding charging orders for Texas partnerships and LLCs.

Texas will now use the so-called Delaware approach to charging orders. Under this approach, charging orders are the exclusive remedy of creditors to reach the ownership interest of an owner of one of these Texas entities. The charging order is considered a lien on the owner’s interest. The creditor specifically has no rights to interfere in the entity's operations or to exercise any remedies regarding the entity's assets.

These new rules will create consistency between all of the non-corporate business entities in Texas. They should also reduce the use of Nevada or Delaware entities in Texas. Before these new rules were adopted, Nevada or Delaware entities may have been used in order to get more certainty regarding charging orders and the asset protection that owners of them may expect to get from these entities. Using Nevada or Delaware entities in Texas for asset protection purposes should no longer be necessary with the adoption of these new rules.
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