Business owners, regardless of size, have reason to be concerned about their choice of entities in Florida following the decision rendered in Olmstead v. FTC in June 2010. In that case, the Florida Supreme Court decided that a creditor who held a judgment against the only member of a limited liability company could gain control of the LLC and use the LLC assets to satisfy the judgment. Prior to that decision, the most a creditor could get against the LLC was a charging lien that would not be satisfied absent the sale or transfer of LLC membership interests to a third party. The very reason many business owners chose single-member LLC entities – creditor protection – may have been eviscerated by the Florida Supreme Court.
Olmstead and Connell were sued by the FTC for unfair and deceptive trade practices [what business were they in]. The FTC got a $10 million judgment against them after litigation and began collection efforts. As part of their collection efforts, the FTC searched for and located assets in multiple jurisdictions. Of significance to the ultimate Florida Supreme Court decision, during their collection efforts the FTC became aware of several Florida limited liability companies which either Olmstead or Connell were the only member.
The FTC took action to force Olmstead and Connell to turn over their respective membership interests in those LLCs, Olmstead and Connell claimed their membership interests were protected and shielded from creditors like the FTC.
The Court correctly decided that a creditor can levy on an LLC membership interest where there is a judgment against the sole member of an LLC. Because there are no other members to protect, the ability to levy on the interest should not be limited because no other members (whether natural persons or entities) would be affected.
As a result, the Olmstead decision, based on the unique facts of the case, only directly impacts single-member LLCs. However, the rationale of the Court’s decision is expected to lead to attacks on multiple-member LLCs in the future which are still protected from the creditors of your co-members.
If you are a member of a single-member LLC, there are some things you should do. For instance, you may want to consider admitting another member to ensure that you are multiple-member LLC and the requisite protections against any creditors of your members. Naturally, there are several federal taxation issues that need to be addressed to properly structure such an arrangement and it also will require the creation of or amendment to the current operating agreement to address voting, management and other member rights.
As an upshot of those changes, the resulting multiple-member LLC will be protected because the creditor of any one member cannot step in and take control of that member debtor’s membership interest in the LLC. Instead, that creditor can only get the charging order – which is as discussed earlier will not impact the ongoing operations of the entity and may only be triggered at the time of a sale or assignment of membership interests.
If you currently are a member of a single-member LLC you should seek the assistance of well-qualified business lawyer and accountant who can assist with you protection measures outlined in this article. Proactive planning will ensure that you avoid the problem created by the Olmstead case for single-member LLCs.
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