July 20, 2010

Single-Member LLCs Stripped of Asset Protection: 
Olmstead v. Federal Trade Commission

In a recent ruling by the Supreme Court of Florida, asset protection for single-member limited liability companies (“LLCs”) has been struck a major blow.  Prior to this June 24, 2010 decision, single-member LLCs provided protection from a creditor and the only remedy available to a creditor was something called a “Charging Order.”  A Charging Order limited Judgment Creditors to the right to receive distributions available to a debtor-member (the LLC’s owner), but did not give a Judgment Creditor that member’s ownership rights in the LLC.  This meant that while Judgment Creditors were entitled to receive distributions, they could not order any distributions to be made, for instance. 

Now, with the new ruling in Olmstead v. Federal Trade Commission, creditors of single-member LLCs have the right to a debtor-member’s entire membership and ownership interest in the single-member LLC. This means that a Judgment Creditor becomes a legal owner for all purposes and may proceed to sell or liquidate the LLC in order to satisfy the judgment.  In other words, a Judgment Creditor steps into the shoes of the debtor-member and exercises all of that Member’s ownership rights and powers. 

What can you do to protect your single-member Limited Liability Company from creditors now? 

The following are two examples amongst a number of possible remedies that can be effectively applied on a case-by-case basis. 

1. Adding an additional member to your LLC; however, you must have an Operating Agreement that clearly states that your LLC is a multi-member LLC and sets forth the premise that an assignee or Judgment Creditor cannot become a member, unless all of the members consent.
   
2. Converting your LLC to a Limited Partnership or a General Partnership; while the bad news coming out of the Olmstead case is that an LLC’s asset protection has come under attack, the good news is that the court simultaneously confirmed that asset protection for Limited Partnerships and General Partnerships is in tact. The Charging Order remains the exclusive creditor remedy for these entities under Florida law. 

In light of the dramatic effect of the recent decision by the Florida Supreme Court in diminishing the protective status of single member LLCs, we highly recommend that all those with single member LLCs schedule a meeting with our legal office to review alternative options as soon as possible.

 Please call us at 305-931-3200 with any questions or to schedule an appointment.

Until next time,

Austin A. Frye, MBA, JD, CFP

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