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Beware of Florida Single Member LLC’s: Seven Ways to Avoid this Sand Trap

By: Phillip B. Rarick, J.D., and Jay R. Beskin, J.D.
Miami Asset Protection Attorneys

Background Summary:

Last year in a blog we advised you that the “Olmstead Patch” – the Florida legislature’s attempt to fix a hole in the Florida LLC statute as a result of the 2010 Olmstead decision – strengthened multi-member LLC’s, but weakened single member LLC’s. (Olmstead Patch Bill Signed by Governor, June 11, 2011)

Prior to the Olmstead decision, the membership interest of the sole member of a LLC (limited liability company) could not be attached by that member’s judgment creditors. A judgment creditor could only obtain a charging order against that membership interest, which means that the creditor could only obtain distributions from the LLC if and when made.

The Olmstead decision held that a judgment creditor could attach the membership interest of the sole member of a LLC such that the creditor could in effect seize the business. As a result of this decision, the legislature enacted the Olmstead Patch which made a significant compromise giving multi-member LLC’s protection, but single member LLC’s were essentially “thrown under the bus”. Specifically, the law is now clear that a charging order is the exclusive remedy against a multi-member LLC, but not against a single member LLC.

Primary Take Away Point:

Florida Single Member LLC’s offer minimal asset protection from creditors of a member; multi-member LLC’s, if properly structured with a robust operating agreement, will generally provide excellent protection from such creditors.

Seven Possible Action Items for Client:

1. Convert single member LLC to a multi-member LLC. Example: The single member can gift 5-10% interest to a family member or possibly to a defective irrevocable grantor trust for the benefit of the member’s children.

2. Convert the single member LLC to a Florida limited liability limited partnership. One advantage of this approach is that it will eliminate any reverse pierce argument by creditors of both members

3. Convert a Florida LLC to a Delaware, Texas, Nevada or Wyoming LLC that has an LLC Act providing that the charging order is the exclusive remedy of a creditor against a single member LLC.

4. If the client is married: have married client transfer membership interest from individual ownership to tenants by the entireties ownership or tenants in common ownership with the other spouse.

5. Convey LLC membership interests to an offshore trust but subject to fraudulent conveyance arguments.

6. Consider an off-shore LLC, such as a Nevis LLC. A Nevis LLC is more expensive to establish, but the quality of asset protection verses a domestic entity is much superior. The annual cost to maintain a Nevis LLC is only approximately $440.

7. Make sure the Client has an up-to-date operating agreement with aggressive anti-Olmstead provisions and Ehmann provisions that clearly structure the agreement as an executory contract (and therefore make the debtor’s membership interest unattractive to a Bankrupcty trustee.)

This last point may be the most important. In our practice, we have seen clients come in with LLC’s that they set up themselves or by a non-lawyer for a cheap price. Invariably, these LLC’s lack a good operating agreement – or simply do not have one at all. A good operating agreement can help assure that your business is not taken over by a judgment creditor. Without one, your interest in an LLC – and the valuable assets it is designed to protect – may be exposed to creditors.

For more information: Contact Miami asset protection attorneys Phillip B. Rarick or Jay R. Beskin at (305) 556-5209.

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