In prior years, many people formed Florida limited liability companies (LLCs) thinking that assets owned by the LLC could not be attached by creditors and that a creditor would not be permitted to take direct ownership of the LLC membership interest. However, due to a recent change in the law, these protections are only applicable in the case of a multi-member LLCs.
Following the Florida Supreme Court opinion in Shaun Olmstead, et al., v. Federal Trade Commission, issued on June 24, 2010, the Florida Legislature amended Fla. Stat. Section 608.433 to clarify the case law in connection with charging order remedies in the context of an LLC. Fla. Stat. Section 608.433 now confirms that a charging order is the sole and exclusive remedy for any personal creditor of a member owning an interest in a multi-member LLC. A charging order is a lien on a member’s interest in an LLC which directs that if a distribution is made from the LLC, such distribution must be distributed to the creditor of the member. However, if no distributions are made, the creditor with the charging order receives nothing.
In the case of a single-member LLC, the judgment creditor of the owner of the LLC is not limited to a charging order, and may petition the Court to foreclose on the owner’s membership interest in the LLC. If the creditor is successful, the Court may order the sale of the owner’s membership interest, and the purchaser at the foreclosure sale would obtain the member’s entire ownership interest in the LLC. By virtue of the sale, the purchaser would become the sole member of the LLC, and the existing owner would cease to be a member.
Unlike a handful of other states that provide broad protection against foreclosure sale of all LLC member interests (regardless of the ownership structure), the protections in Florida do not extend to single-member LLCs. Because of the risk of a judicial foreclosure in the case of a single-member LLC, business owners utilizing LLCs should almost always consider multi-member status as an option.
An LLC will generally be considered a multi-member LLC as long as there are two or more members. There are several options for converting a single-member LLC into a multi-member LLC. For example, you may add a family member, trust, or other business entity as a minority member of the LLC. In adding a new member, you should carefully consider whether a sale, gift or the issuance of an additional membership interests is the best option. Once the additional member has been added, the LLC will be required to file a separate federal income tax return, and must elect to be taxed either as a partnership, C-Corporation or S-Corporation. Depending on the assets and liabilities of the LLC, partnership tax status may be preferable. If you have any questions about the tax status of the LLC, you should consult with your tax advisor.