In case you thought your LLC was safe from creditors, think again. Florida’s Supreme Court has recently ruled that interests in single member LLCs can be taken in a charge order to satisfy the owner’s personal debts and judgments against them. The real kicker though is that this judgment may affect multi-member LLCs as well.
In Shaun Olmstead v. Federal Trade Commission, the appellant was accused of credit card fraud and was sued by the FTC for $10 million. Part of what went into Florida’s decision to force Olmstead to give up the LLCs with their associated assets was that there was nothing in their Articles of Organization giving members the right to prevent someone from buying or otherwise acquiring an ownership interest in the LLC. Why would there be? It was a single member LLC.
So if you have a multi-member LLC with member approval required for the transfer of an individual’s interest, than you are protected…right? The written dissent in the case says not so fast. Judge Lewis, writing the dissent, argues that Olmstead will allow creditors to take a member’s interest in a multi-member LLC. Lewis argues that if the court can disregard the meaning in chapter 608 of the Florida code, that somehow a creditor taking an LLC member’s interest is a voluntary transfer, than there is nothing to keep a court from making the same rule for a “voluntary” transfer and approval in a multi-member LLC.
Enough with the legalese. What does this mean for you? If you are a partner in an LLC with assets, it could mean those assets are at risk. How do you protect yourself? Here are some ideas:
– You can convert your LLC to an LP or LLLP. LPs require the active partners who manage the operations to be general partners subject to the partnership’s liabilities, but you can structure the ownership of the LP to reclaim liability protections. An LLLP provides limited liability to the general partners as well. (Important! The state filing fees may be significantly higher for an LP or LLLP. Florida charges $1,000 for a Florida Certificate of Limited Partnership and $500 a year for the annual report. This is opposed to the $125 to start an LLC and $138.75 annual report afterwards. Fees in other states may be significantly less.)
– You can move your LLC out of Florida. Olmstead is a Florida case and does not affect Delaware, Texas or Wyoming which have specific protections against reverse piercing to confiscate the LLC’s assets.
– Another solution to this may be to form an out of state LP or LLC with you and your LLC as the partners and make the LLC the general partner. By putting the assets in the LP, if creditors are able to go after your LLC, they will not reach your LP. On the other hand, if someone goes after the LP, the liable member will be your LLC which will protect you personally. This is recommended especially for LLCs that are taxed as S Corps. Fees for an LP are much lower in other states like Delaware where you can file for $250 and pay an annual franchise fee of $250.
– Have members each own less than 50% of the LLC so that they do not have a controlling interest in case their membership is taken. You can also put transfer restrictions on ownership and make sure they are referenced in the member’s ownership certificates. Tread with caution: while this most likely will work there is no Florida case law to support this. In fact, the dissent in Olmstead hinted that it may not.
In addition to the hefty Florida filing fee, some lawyers are charging a small fortune to convert your LLC into a safer entity type. Consult with your accountant regarding the size of your company and personal liabilities that may factor in. Hopefully you are not engaged in credit card fraud like Shaun Olmstead was, but how well do you know your partners? If you have an accountant who has done multi-state mergers and entity classifications, they may be able to help and/or refer you to a honest lawyer. Hint: we can help.