The Advantage of Multi-Member LLCs in Florida: A Closer Look at Creditor Remedies and the Charging Order

The Advantage of Multi-Member LLCs in Florida: A Closer Look at Creditor Remedies and the Charging Order

Establishing a multi-member LLC in Florida offers distinct advantages for asset protection.

April 5, 2024

Florida's business environment is a favorite among entrepreneurs, not only because of its business-friendly policies but also due to specific provisions related to creditor protection in Limited Liability Companies (LLCs). One such provision involves the remedies available to the creditors of single-member LLCs (SMLLCs) compared to multi-member LLCs (MMLLCs). Understanding these differences can be pivotal for individuals looking to safeguard their assets.

Single-Member LLCs vs. Multi-Member LLCs: The Creditor's Point of View

In Florida, if an individual owes money and possesses a single-member LLC, the creditor has a potent remedy. The creditor can foreclose upon the debtor’s membership interest in the LLC. This can be drastic as it can ultimately lead to the sale of the LLC's assets to satisfy the debt. 

However, for multi-member LLCs, the landscape changes. Florida's Revised Limited Liability Company Act, specifically under section 605.0503(6), prohibits creditors from using the remedy of foreclosure against a debtor’s membership interest in an MMLLC. Instead, they are limited to a "charging order." 

What is a Charging Order?

A charging order is a remedy that allows a creditor to receive any distributions from the LLC that would have gone to the debtor-member. Yet, it's essential to understand that with a charging order, the creditor does not step into the shoes of the member. They cannot control or manage the LLC or force it to make distributions. As a result, if the LLC decides not to make any distributions, the creditor might end up with nothing.

Advantages of the MMLLC Structure

Given the limited power a charging order provides to the creditor, it's evident that for someone concerned about personal creditors reaching their LLC assets, an MMLLC is the way to go. However, how does one ensure that their LLC is a genuine multi-member entity?

Adding a Second Member who will Participate in Ownership of the LLC

When considering a transition to a multi-member LLC, you might opt to bring in another member who holds an actual membership interest (i.e., a transferable economic interest in the business). This means granting them a share of the profits, losses, and rights to distributions. Adding a second member with a transferable economic interest requires an amendment to the operating agreement, clearly defining their stake, rights, and responsibilities. This addition not only enhances asset protection by introducing the limitations of the charging order for creditors, but also brings potential benefits in the form of shared responsibilities, expertise, and investment. 

When considering exactly how much membership interest the second member should get, there is not a bright-line rule; however, because this decision also has tax implications, most LLCs adding a second member for MMLLC/charging purposes will grant at least 5% of the membership interest to the member. Be sure to check with your tax advisor before making any decisions in this regard.

Adding a Second Member Without a Transferable Economic Interest - Section 605.0401(4) 

But what about the person who really is a single owner? What if they don’t have (or don’t want to add) a spouse, close family member, or friend as a true economic owner of the LLC? Are they stuck with having their membership interest up for grabs by judgment creditors?

Fortunately, there is a potential solution for them too: and the answer lies within a little-known provision contained in section 605.0401(4), Florida Statutes. According to this section of the Florida Revised Limited Liability Company Act, a person can become a member of an LLC without “acquiring a transferable interest and without making or being obligated to make a contribution to the limited liability company.” 

In other words, you can become a member per se, without actually acquiring a traditional membership interest with rights to the profits and losses, and without being required to make a capital contribution to the company. And instead of economic rights, the person is granted some rights (such as the authority to approve certain non-essential decisions, or the right to audit and review records of the LLC). 

In the context of creating an MMLLC, this second member would, under the language of the statute, suffice. This provision therefore offers a powerful tool for those looking to gain the protection of the MMLLC structure without diluting their ownership, or worrying about entanglements with a friend or family member who aren’t actually interested in becoming bona fide owners.

Florida Case Law on the Issue

As of my last update in 2022, Florida case law has consistently supported the robust protections offered to members of MMLLCs. The courts have upheld the exclusive remedy of the charging order for creditors of members in MMLLCs, reinforcing the wisdom of choosing a multi-member structure if asset protection is a priority.

The Olmstead v. FTC case was a significant decision that addressed this issue. While it did grant the ability for creditors to reach the assets of a single-member LLC, it left intact the stronger protections for MMLLCs. Post-Olmstead, the Florida legislature amended the act to specifically incorporate the protections for MMLLCs, resulting in the current statute and its distinctions between SMLLCs and MMLLCs.

Concluding Thoughts

Establishing a multi-member LLC in Florida offers distinct advantages for asset protection. However, navigating the intricacies of the law requires a thoughtful approach. By understanding provisions like section 605.0401(4), Florida Statutes, individuals can maximize protection without compromising their economic interest in their business. 

As always, it's crucial to consult with an experienced business attorney when making decisions about the structure and membership of your LLC. Small decisions in this arena can have huge (and sometimes disastrous) consequences without careful planning.

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