Single Member LLC Florida Asset Protection
Single member LLC Florida asset protection is important if you want to make sure your assets are secured.3 min read
2. The Olmstead Case
Single member LLC Florida asset protection is important if you want to make sure your assets are secured. Forming a limited liability company (LLC) is often an effective asset protection plan, as the LLC's assets are typically protected from individual owners' lenders and creditors. However, Florida's Supreme Court has shown that a single-member LLC may not, in fact, be protected from their creditor.
Important Terms in LLC Florida Asset Protection
If you've moved an asset to an LLC in order to keep the asset out of the lender's hands, Florida law allows the lender to bring charges against the LLC. Even if you did so with good intentions, if you moved it within a certain time frame, and you did not receive adequate value in exchange, it may be considered a fraudulent transfer. The concept of adequate value is known as consideration. Consideration is an important and multi-layered concept in law, and you will not learn the nuances of acceptable consideration through browsing the Internet.
A charging order states that any distributions from the LLC to the debtor member must go directly to the creditor. The member retains their interest, and the creditor receives the distribution.
Revised Uniform Limited Liability Act
Florida recently adopted this code, which includes specific rights regarding LLC asset protection that many other states do not have. Unlike states with long histories of interpreting this code, Florida courts can essentially invent the outcome.
The Olmstead Case
The Florida Supreme Court made an impactful decision regarding asset protection in the landmark Olmstead v FTC (2010) case, in which the personal protection of a single member LLC is now uncertain. Before the Olmstead case, a creditor of an LLC member could not claim title to the member's interest in the company in order to satisfy debt, but instead could only acquire a charging order against the debtor.
In the Olmstead case, the Federal Trade Commission (FTC) was granted a $10 million judgment against Shaun Olmstead and Julie Connell, which it wished to collect by seizing two of Shaun's single-member LLCs. The Supreme Court examined Florida Statute section 56.061, which generally covered the right of creditors to take debtors' assets. The statute describes allowing the seizure of corporate stock to satisfy the debt, but did not cover a debtor's interests in their LLCs.
The court determined that a limited liability company is a kind of corporate entity, and thus “an interest in an LLC is personal property that is reasonably understood to fall within the scope of ‘corporate stock.'” Since there were no additional limitations, the Supreme Court decided that under Florida's general execution statute, the FTC shall have the right to transfer Olmstead's interest in the LLCs to the FTC.
The Florida Supreme Court determined that since the sole member of an LLC has an indisputable right to transfer their full interest in the LLC, and since the Florida LLC Act contains no language to the contrary, a creditor need not be limited to issuing a charging order as the sole remedy for a judgment against the debtor. Therefore, a single-member LLC may be taken by the creditor in order to satisfy their judgment.
The Florida Legislature drafted the “Olmstead Patch” in 2001 to clarify the law around this controversial issue. It determined that, in cases of judgment against a member of a multiple-member LLC, a charging order shall be the only acceptable remedy. However, if a creditor can prove that payments distributed under a charging order will not meet the judgment requirements within a reasonable timeframe, the sale of single-member LLC interest and foreclosure remain legitimate options.
If you intend to form an LLC in Florida and hold assets within the company, it's crucial to consult a legal professional. If you don't understand the legal formalities of the entity, you might not maximize the benefits of your company at best, and encounter major legal issues at worst. Asset protection does not naturally occur as part of the formation of the LLC, rather it exists in the drafting of the operational documents. Different clients will have different needs and goals.
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