Limited Liability Companies (LLCs) are a favorite type of of business entity for many businessmen. Advantages of LLCs include the following:
- Limited liability – no “member” is liable for anything other than the amount of his investment in the LLC, regardless of how involved that member is in the daily operations of the business.
- Taxed as a partnership – can elect to be treated as a partnership, so LLC can operate as a “pass-through” entity and avoid double taxation (“check the box” option), and there is flexibility in allocation of gains and losses that is not present in S corporation.
- Flexibility in operations – provides nearly total flexibility in how operations are to be conducted.
A judgment creditor is somebody who has proved that he is owed a debt and has received permission to use judicial process to recover the debt. One method used by judgment creditors to collect the debt is a charging order. A charging order requires the debtor to compensate the creditor with any distributions the debtor would otherwise receive.
Another perceived benefit was that Florida LLCs had charging order protection. Under this type of protection, a creditor who had a charging order on an LLC member’s interest had no power over the LLC’s distributions or its management and affairs.
In Olmstead, et al. v. The Federal Trade Commission, the Florida Supreme Court held that a judgment debtor is not exempt from surrendering right, title, and interest in his single-member limited liability company to satisfy an out-standing judgment. In other words, the charging order protection no longer applies. The opinion was submitted on June 24, 2010. While the Court did not explicitly say that the holding also applies to multiple-member LLCs, it did point out that Florida Statute Section §608.433 does not make a charging order the exclusive remedy of a creditor, whereas the Florida Revised Uniform Partnership Act and the Florida Revised Uniform Limited Partnership Act do. Thus, there is no reason to believe that this opinion will not also be applied to multiple-member LLCs, at least until the legislator hopefully steps in to clear up all confusion.
What can you have your attorney do to protect your company against judgment creditors looking for something more than a charging order? You may ask your attorney to look into bifurcating your LLC’s membership interests into voting and nonvoting interests, converting the LCC to a limited partnership or limited liability limited partnership, or moving the LLC to another jurisdiction (i.e. Delaware).