Texas LLC owners hear a lot about charging orders. If a creditor wins a judgment against you personally, Texas law says the creditor's exclusive remedy against your LLC interest is a charging order, a right to receive distributions if and when the LLC makes them. The creditor cannot take over your company, vote your interest, or seize the LLC's property.

That is powerful protection against a private creditor. Business owners with personal IRS debt understandably hope it protects them from the IRS too. The short answer is that it helps far less than they think, because the federal tax lien does not run on state creditor statutes.

What Texas law provides

Texas Business Organizations Code section 101.112 governs charging orders against LLC membership interests. As general information: the charging order is described as the exclusive remedy by which a judgment creditor of a member can satisfy a judgment out of the member's interest; the creditor gets only the right to receive distributions the member would otherwise receive; the charging order is a lien that cannot be foreclosed; and the creditor cannot reach the LLC's own property. A 2023 amendment made clear that the protection applies to single-member LLCs too.

If you are relying on that statute against a private creditor, have a Texas business attorney confirm how it applies to your situation. This guide is about why the IRS sits in a different position.

Why the IRS is different

When your personal tax goes unpaid after notice and demand, IRC 6321 creates a lien on all of your property and rights to property. State law tells us what rights you have. Federal law decides whether those rights are property the lien can reach, and how the IRS may collect.

Your membership interest in an LLC is property. You own it. So the federal tax lien attaches to it. State statutes that limit how ordinary creditors can collect, such as exemption laws and exclusive-remedy provisions, generally do not limit federal tax collection. The Internal Revenue Manual takes the position that state exemption statutes do not apply to the federal government, and courts have applied that principle repeatedly. My guide on why Texas asset protection does not stop the IRS covers the broader point.

What the IRS can do with your LLC interest

In practice, the IRS has several tools when a member owes personal tax:

  • Levy on distributions. The IRS can serve a levy on the LLC to capture distributions or other payments owed to you. Guaranteed payments, management fees, and wages the LLC pays you are all reachable by levy, and wages are subject to a continuous levy under IRC 6331(e).
  • Levy on the interest itself. The IRS may seize and sell your membership interest under its administrative levy and sale procedures. What a buyer gets depends on the operating agreement and state law, which often limit a transferee to economic rights. That limits the sale price, but it does not stop the IRS from taking the interest.
  • Lien on the interest. The lien stays attached to the interest. If you sell it, the buyer takes subject to the lien unless the IRS discharges it.
  • Suit in federal court. Under IRC 7403, the government can ask a federal court to enforce its lien against property in which the taxpayer has an interest. That forum is not bound by the Texas charging order statute.

Single-member LLCs and the nominee problem

A single-member LLC that is disregarded for income tax is still a separate legal entity under Texas law. The IRS generally cannot just ignore the LLC and seize its bank account for your personal income tax, because the LLC, not you, owns that account.

But the IRS has two doctrines that can collapse that separation. If the LLC holds assets that are really yours, such as a house titled in the LLC but used as your personal residence with no business purpose, the IRS may treat the LLC as your nominee. If you and the LLC are so intertwined that your affairs cannot be separated, with commingled accounts, personal bills paid by the LLC, no records, and no capital, the IRS may treat the LLC as your alter ego and reach all of its assets.

Both theories require Area Counsel approval before the IRS files a special condition lien or levies, according to IRM 5.17.14.7. My guide on nominee and alter ego liens in Texas explains the factors in detail.

The reverse question: LLC debt and the owner

The analysis runs the other direction too. When the LLC owes federal tax, can the IRS collect from you? It depends on the tax and the entity's classification.

A single-member LLC that is disregarded for income tax is still treated as a separate entity for employment taxes and certain excise taxes under Treas. Reg. 301.7701-2(c)(2)(iv) and (v). The LLC owes its payroll taxes. Your personal exposure comes through the trust fund recovery penalty, which reaches responsible persons regardless of entity form.

For a multi-member LLC taxed as a partnership, the IRS's manual cites Rev. Rul. 2004-41 for the rule that if state law does not make members liable for the LLC's debts, the IRS generally cannot collect the LLC's federal taxes from the members. Texas law generally shields LLC members from the company's debts. That is a real protection, and it is the opposite of a Texas general partnership.

What actually protects an LLC owner who owes the IRS

Not a statute. A resolution. Charging order protection might make a private creditor settle. It will not make the IRS go away.

The tools that work against the IRS are federal: a payment plan that stops levies, an offer in compromise when the numbers support it, hardship status, a Collection Due Process hearing when a levy notice arrives, and the ten-year collection statute. Your LLC interest will be on the financial statement the IRS reviews in every one of those programs. Disclosing it accurately is required. Valuing it correctly, with discounts for lack of control and marketability where appropriate, is where an advocate earns their fee.

And do not move assets into the LLC after the IRS comes calling. Transfers after a tax debt exists invite fraudulent transfer claims, which put the asset and possibly the LLC itself in the IRS's reach.

Texas built a wall around LLC interests. The IRS was never on the other side of it. If you own a Texas LLC and owe personal taxes, or the LLC owes and you are worried about your personal exposure, let's sort out which rules actually apply: 813-229-7100. The firm's small business IRS guide is also worth a read.

Frequently asked questions

Does Texas charging order protection stop the IRS?

Generally no. The federal tax lien under IRC 6321 attaches to your membership interest as property, and state statutes limiting ordinary creditors' remedies generally do not limit federal tax collection. The IRS can levy distributions and payments the LLC owes you and may seize the interest itself.

Can the IRS take my single-member LLC's bank account for my personal taxes?

Not simply because you own the LLC; the LLC is a separate legal entity. But if the LLC is your nominee or alter ego, for example because of commingled funds or personal assets titled in the LLC, the IRS may reach its assets after Area Counsel approval.

Am I personally liable for my Texas LLC's federal taxes?

Generally not for income taxes of an LLC taxed as a partnership or corporation, because Texas law generally shields members from company debts. But responsible persons can be personally liable for unpaid trust fund payroll taxes through the trust fund recovery penalty.

Should I transfer assets into my LLC to protect them from the IRS?

Not after a tax debt exists. Transfers made to hinder a creditor can be set aside as fraudulent transfers, and the IRS can use nominee or alter ego theories to reach the assets. Address the debt directly with a federal resolution option instead.

General information, not legal advice. Darrin T. Mish practices federal tax law. Where other areas of Texas law are discussed, confirm the point with a lawyer who practices in that area before relying on it.