Florida Supreme Court Limits Protection for Single Member LLC's
It has generally been assumed that when a creditor of an LLC member gets a judgment against that member, the only thing the creditor can do is to get a so-called "charging order". Such an order does not give the creditor control of the LLC -- just a right to receive distributions if and when they are made. This is one of the advantages of an LLC over a corporation for asset protection purposes. If you own shares of a corporation, a creditor can generally gain control of those shares much more easily than it could gain control of an LLC interest.
But on June 24, 2010, the Florida Supreme Court ruled in the case of Olmstead v. Federal Trade Commission that because the Florida Limited Liability Company Act does not specifically make a charging order the exclusive remedy of a creditor, the creditor can use other remedies to gain control of a single member LLC interest. This means a creditor can gain total control of the LLC. Even worse, the Court's logic raises at least some concern about protection of multi-member Florida LLC interests. Two dissenting justices on the Florida Supreme Court strongly disagreed with the decision and accused the majority of justices of rewriting the Florida statute.
Some states (like Delaware) make clear in their state statute that a charging order is the exclusive remedy of a judgment creditor. So this recent Florida decision is of no concern to owners of single member Delaware LLC's. But it does raise concerns about single member LLC interests in various other states.
Like many other asset protection attorneys, I will be studying this decision in much greater detail in the coming weeks.
This case is a reminder that asset protection law is constantly evolving, so it is advisable to periodically consult with an attorney even if you already have an asset protection plan in place.
What other way can a member of a single member Florida LLC be protected from liability? How is it going to look if we all change to an LLP or LLLP. Is that going to be considered fraudulent under Florida law?
A Florida LLC is not the only form of asset protection available. Some states, including Delaware, specifically provide that a charging order is the sole remedy available to a creditor of an LLC member with respect to that member's interest in the LLC. So an LLC formed in a state other than Florida may be an option. We will also have to wait and see if Florida chooses to amend its LLC statute by adding a provision like the one in Delaware and some other states.
If understand the matter right a judgment was against that member of FL LCC not against LLC, right? Limited liability protects LLC member form debts accumulated by LLC however if debts were made by an individual who owns LLC, creditors can go after LLC assets. LLC FL
Jeni -- Your understanding is correct. The Olmstead case sealt with a judgment against an LLC member, not the LLC itself. An LLC in Florida (and any other state ) should still provide liability protection for the owner(s) from any debts of the LLC. So even if there is a huge judgment against the LLC, the other assets of the owner(s) should generally not be affected.
I just formed an LLC and was informed of this case by one of my attorney friends. He suggested that I add another member to the LLC in order to avoid full liability. However, would that second member be 50% liable as well or does this eliminate any liability for the two members? Also, is this limited to debts only or is it for any type of lawsuit?
Connie -- Your attorney friend is correct that a multi-member LLC is going to provide much better asset protection for you personally than a single member LLC. But "adding" an LLC member could have all kinds of implications. For example, if you "add" another member, that new member might be entitled to half the profits and might have half the voting rights. If the member is a close family member, maybe that is fine. No member should be liable for the debts of the LLC if it is set up properly. But if there is a judgment against your new member personally, that could potentially affect you in some ways. The bottom line is that if you add another member you have to think through how that is going to affect your LLC and its business. Please keep in mind that these comments (like most of my comments) are a very general response to some very general questions. Consulting with an attorney would be advisable if you decide to add a new member.
Should a Florida resident who has a single member Delaware series LLC put all their assets (stocks etc) in the name of the LLC even if the LLC is just acting as a holding company? If so, how does this provide asset protection if it is a single member?
Jay -- I would need a lot more background information to provide a meaningful response to your question. But it would not seem to make any sense to put all your assets in a single member LLC in Delaware or any other state, especially if that entity is being used as a holding company. It would seem that other alternatives should be considered. Again, I really do not have enough information to offer any kind of specific advice.