Asset protection is a vital consideration for individuals seeking to shield their personal assets from potential legal claims and liabilities. In order to further this objective, the Florida legislature enacted the Florida Limited Liability Company Act in 1982. Limited liability companies are not corporations or partnerships, although they have similar characteristics. An LLC is akin to a partnership in terms of tax benefits – the tax burden passes through the LLC to its members thus avoiding the issue of double taxation. However, unlike partners of a partnerships, the members of an LLC are not personally liable for the actions or debts of the LLC – with some exceptions, including the one discussed in this article. In that sense, LLCs enjoy the liability protection of a corporation.
One of the questions that comes up often in my practice is whether there is less liability protection for members of single-member LLCs as opposed to multi-member LLCs. Single member limited liability companies (LLCs) have been widely used as an effective tool for asset protection. However, the Olmstead case, a landmark legal decision, has raised questions about the extent of protection afforded to single member LLCs. This article explores the Olmstead case and its implications for asset protection through single member LLCs. If you would like to read more about different types of entities, their benefits, limitations and other considerations, read CHOICE OF BUSINESS ENTITIES.
Understanding Single-Member LLCs in Florida
A single-member LLC is an LLC with one owner, also known as a member. This type of LLC is a separate legal entity from the owner, offering a layer of liability protection. This means that the member is generally not personally liable for the LLC's debts and obligations[1]. Furthermore, single-member LLCs in Florida benefit from pass-through taxation, where the company's profits or losses are reported on the member's personal income tax return.
The Olmstead Case: A Turning Point for Single-Member LLCs
In 2010, the Florida Supreme Court ruled on Olmstead v. Federal Trade Commission,[2] a case that shifted the landscape for single-member LLCs in the State. The defendant, Shaun Olmstead, had transferred assets into single-member LLCs to protect them from being seized by the Federal Trade Commission (FTC), which had won a multi-million dollar judgment against him. The central question in the case was whether a charging order[3], which is typically used to satisfy a member's debt through distributions from an LLC, was the sole remedy available to creditors seeking access to a debtor's interest in a single member LLC. The case ultimately reached the Florida Supreme Court, which made a significant ruling impacting single member LLCs and asset protection strategies.
The Florida Supreme Court ruled in favor of the FTC, deciding that the full interest of a debtor in a single-member LLC can be taken by a creditor to satisfy an outstanding judgment. This was a groundbreaking decision, as it was contrary to the traditional view of LLCs providing a layer of protection against personal liability.
Implications for Single Member LLC Protection
1. Charging Order Protection: The Olmstead case clarified that a charging order may not provide absolute protection to single member LLCs. Creditors can potentially gain more extensive rights beyond just charging order distributions, such as seeking a court-ordered foreclosure and forcing the sale of the LLC interest to satisfy the member's debt.
2. Piercing the Corporate Veil: In certain circumstances, the court may "pierce the corporate veil" and hold the single member LLC's owner personally liable for the company's obligations. This typically occurs when the court determines that the LLC was not adequately separate from the individual's personal affairs or that there was fraudulent or improper conduct involved.
3. Enhanced Asset Protection Strategies: In light of the Olmstead case, individuals seeking enhanced asset protection may consider incorporating additional strategies alongside single member LLCs. These may include the use of multiple LLCs or incorporating other asset protection tools like trusts or family limited partnerships. Consulting with an experienced attorney is essential to develop a comprehensive asset protection plan tailored to individual circumstances.
Post-Olmstead: Changes to Florida's LLC Law
In response to the Olmstead ruling, Florida revised its LLC legislation in 2013. The Florida Revised Limited Liability Company Act now provides that a charging order is the exclusive remedy by which a judgment creditor of a member or transferee can satisfy a judgment from the judgment debtor's interest in an LLC. This applies to both multi-member and single-member LLCs.
However, the legislation does include an exception similar to the Olmstead ruling. If the creditor can show that distributions under a charging order will not satisfy the judgment within a reasonable period, the court may order a foreclosure of the member's interest in the LLC.
Does a Single-Member LLC Offer Less Liability Protection?
The revised LLC legislation in Florida has certainly improved the liability protection for single-member LLCs compared to the immediate post-Olmstead era. However, the possibility of a foreclosure in certain situations does mean that single-member LLCs may offer less liability protection than multi-member LLCs.
In multi-member LLCs, creditors' rights are generally restricted to a charging order that gives them the right to receive distributions that would otherwise go to the debtor-member. Foreclosure is generally not an option, as it would unfairly affect the other non-debtor members. Since the ruling in Olmstead and enactment of the Olmstead patch, Florida courts have continued to hold that the member of the limited liability company is not personally liable for obligations of the company beyond its membership interest. See e.g., Houri v. Boariz, 196 So.3d 383 (Fla. 3d DCA 2016).
Protective Measures for Single Member LLCs
1. Compliance with Formalities: Adhering to proper corporate formalities is crucial to maintain the separation between the single member LLC and the individual owner. This includes keeping accurate records, maintaining separate bank accounts, conducting annual meetings, and keeping personal and business affairs distinctly separate.
2. Operating Agreement Considerations: Crafting a well-drafted operating agreement that clearly defines the relationship between the single member LLC and the owner can strengthen the liability protection. This includes outlining the LLC's purpose, capital contributions, distributions, and member's rights and obligations.
3. Seeking Legal Counsel: Given the complexities surrounding asset protection and evolving legal interpretations, consulting with a knowledgeable attorney specializing in business law and asset protection is strongly advised. They can provide guidance on creating a robust asset protection strategy and ensure compliance with state-specific laws and regulations.
Conclusion
The Olmstead case had a significant impact on the liability protection offered by single-member LLCs in Florida. Post-Olmstead, changes to Florida's LLC laws have reinstated some of the protection, but the potential for foreclosure in certain circumstances means that single-member LLCs may still offer slightly less protection than their multi-member counterparts. Business owners should carefully consider their potential liabilities and the implications of the Olmstead case and subsequent legislation when deciding whether to form a single-member LLC in Florida. By engaging legal counsel, maintaining proper formalities, and exploring complementary asset protection strategies, individuals can enhance the effectiveness of their asset protection plans and safeguard their personal assets from potential liabilities. The legal experts at VAdam Law can provide personalized advice based on specific circumstances, ensure compliance with the requirements, and help guide you during the process of establishing your business.
If you would like to learn more about VAdam Law and schedule a free consultation, visit our online scheduling portal or call 24 hours a day at (954) 451-0792.
[1] Broadly speaking, LLC members’ are protected from liability unless the company is used to commit fraud, created solely for the purposes of wrongfully evading creditors, or a court finds there is some other misuse of the corporate form. [2] 44 So.3d 76 (Fla. 2010). [3] The charging order gives the judgment creditor the rights of an assignee against the judgment debtor-member of the LLC. In this way, the distributions made to the member are paid to satisfy the judgment or the LLC interest of the member itself may be assigned to the creditor.
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