12 Jan Beware of the Single-Member Limited Liability Company
April 29, 2013
By: Barry E. Haimo, Esq.
Beware of the Single-Member Limited Liability Company (LLC)
Limited Liability Company (LLC) interests are characterized as personal property under Florida Law. Everyone that forms a business entity to limit their personal liability does so to separate themselves from creditors of the business, or “inside creditors”. Unfortunately, most people fail to realize that a creditor of an owner (known as a “member”) of a single-member LLC, such as yourself, can force you to sell your business, or foreclose your interest, to satisfy a judgment and there’s little you can do about it. Period. Here’s an excerpt of Florida’s pertinent statutory language (emphasis added).
(6) In the case of a limited liability company having only one member, if a judgment creditor of a member or member’s assignee establishes to the satisfaction of a court of competent jurisdiction that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order is not the sole and exclusive remedy by which the judgment creditor may satisfy the judgment against a judgment debtor who is the sole member of a limited liability company or the assignee of the sole member, and upon such showing, the court may order the sale of that interest in the limited liability company pursuant to a foreclosure sale. A judgment creditor may make a showing to the court that distributions under a charging order will not satisfy the judgment within a reasonable time at any time after the entry of the judgment and may do so at the same time that the judgment creditor applies for the entry of a charging order.
(7) In the case of a limited liability company having only one member, if the court orders foreclosure sale of a judgment debtor’s interest in the limited liability company or of a charging order lien against the sole member of the limited liability company pursuant to subsection (6):
(a) The purchaser at the court-ordered foreclosure sale obtains the member’s entire limited liability company interest, not merely the rights of an assignee;
(b) The purchaser at the sale becomes the member of the limited liability company; and
(c) The person whose limited liability company interest is sold pursuant to the foreclosure sale or is the subject of the foreclosed charging order ceases to be a member of the limited liability company.
So What’s The Solution?
You take advantage of assets that are exempt from creditors. You can also structure your company as a multi-member LLC, which enjoys considerably more asset protection benefits. I recommend not relying on Florida’s statute and investing in a strong operating agreement to ensure that you and your partners rights, obligations are clearly expressed. I cannot over stress the importance of doing this right in the beginning. Here’s a great article boiling down the reasons to invest in an operating agreement. The statute is merely a foundation for rights, responsibilities and obligations of the members of the entity.
Barry E. Haimo, Esq.
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Originally posted 2013-04-29 14:00:02.