The Florida Supreme Court recently “set aside” a single member LLC and let the personal creditors of the LLC owner come directly against the LLC assets. The creditor in the Olmstead case last month was simply given the assets of the LLC to satisfy the LLC owner’s debt. (Actually, it was the government coming after Olmstead who was a bad dude. So, the good guy won. Can the government be the good guy?) Nonetheless, this means Florida has come out against the charging order protection that the Revised Uniform LLC Act says single member LLCs should enjoy.
The LLC is unique, because it gives you the “corporate shield” that protects the owners (members) from liabilities of the company, just like the corporate shield in a corporation protects the shareholders from the liabilities of the company. Additionally, the LLC has an element of a partnership, because it protects the company from the personal debts and liabilities of an individual member by making the creditors of the individual get a “charging order” against the company.
If an individual owner of a corporation gets sued, goes bankrupt, gets divorced, or suffers any one of a dozen other “tragedies” in his or her life, the creditor (guy who won the suit, bankruptcy trustee, ex spouse, etc.) simply gets the stock the individual owned in the corporation. If an individual owner of some IBM stock loses his or her stock, it is no big deal for IBM. However, if an individual owner is the only owner of a small corporation and they lose their stock, then they lose the company. The new owner of the stock simply votes out the acting officers and directors and takes over “ownership” of all of the corporate assets.
In a partnership, each of the partners is in the same boat. Any act of one partner binds the others. (That’s why partnerships are so dangerous from a legal standpoint.) Each partner is jointly and severally liable. On the flip side of the coin, if an individual partner gets in trouble through one of the personal “tragedies” and loses their partnership interest, then the other partners suddenly find themselves with a new partner, who can unilaterally bind the other partners, shut down the partnership, and sell the assets of the partnership for their benefit – not a good situation for the other partners.
In order to protect the other partners the concept of a “charging order” was created under English law. Once the creditor gets a judgment, then he has to get the charging order, which says that the new “partner” (creditor) can’t just come in and be a new partner with the ability to affect the partnership. The creditor basically gets a lien against the “economic interest” that the partner lost in the judgment. The creditor gets the benefit of any profit that is split up among the partners, but has no say in how the business is run and can’t access the assets of the partnership.
The Revised Uniform LLC Act says that LLCs, even single member LLCs, have not only the corporate shield protection for the member’s protection, but the LLC company has charging order protection from the individual member’s personal creditors. That’s a great deal, and in some respects gives the LLC a decided advantage over the standard corporation.
The Olmstead case may be a tipping point against single member LLCs. Utah has legislatively stripped single member LLC charging order protection, it is in doubt in Colorado after the Albright case, and now Florida has struck down the charging order protection and just turned the LLC over to the individual owner’s creditors. Note, this does not mean an LLC doesn’t offer a “corporate shield” protection of the owners from activities of the LLC. It simply means the personal creditors of the owners can use assets of the LLC to satisfy the debts of the sole owner of the LLC.
You need to seriously consider having someone else own some of your LLC. I would say at least 5%, because that is the threshold the IRS uses for “significant” ownership of an LLC. In most states a single member LLC still enjoys charging order protection from its owner’s debts, but the cases are starting to stack up against single member LLCs.
Thanks Lee, I had heard about this case, but not with the detail you provided. I appreciate your updates. Do you have any comments you’d like to share with all of us about the idea of having 5% of the LLC owned by a C corp we control, and the other 95% in a life estate?
All my LLC’s were set up as single member with me as Managing Member. However, when I formed a Living Trust, I made that an additional member. Would this be enough protection in Florida and other hostile states? I am concerned because the Living Trust has the same SSN# that I do, so it may be seen by the courts as an extension of me.
Thank you for your prompt response.