A Florida single-member LLC is formed just like a multi-member LLC. You file the Articles of Organization with the Division of Corporations and pay the appropriate fee. Obviously, the major difference with a single-member LLC is that there is only one member. But this distinction has created a serious consequence for Florida business owners.
The primary protection offered by the LLC entity structure is that it provides limited liability protection for members. In other words, the entity shields members from creditors in various ways.
For example, if a member of a Florida LLC is sued and a creditor seeks payment for debts, the assets of the LLC cannot be seized in order to pay for the debt because these assets also belong, at least in part, to other members. As well, should the LLC itself be sued, a creditor cannot seize the personal assets of LLC members as a means of paying the debt.
In these cases, creditors are generally held to using what are called charging orders to remedy debt collection. What is a charging order? A charging order is an order issued by a court directing an LLC’s manager to pay to the debtor-owner’s personal creditor any distributions of income or profits that would otherwise be distributed to the debtor-member. Pay attention to the fact that creditors in Florida can only obtain the owner-debtor’s financial rights with the charging order – they cannot participate in the actual management of the LLC. Thus, the creditor cannot order the LLC to make a distribution to the debtor/member. This makes the charging order a weak remedy for a creditor.
Unfortunately, in 2010, the Florida Supreme Court found that the charging order limitation does not apply to single-member LLCs in Florida. This means that any Florida single-member LLC is not treated by the court system like other LLCs, but instead like a sole proprietorship. (Olmstead v. Federal Trade Commission). In a worst-case scenario, a creditor seeking repayment from a single-member LLC in Florida could seize control of the company, redirect distributions and liquidate assets until the debt is paid.
To avoid application of Florida’s single member LLC rules and obtain the fullest limited liability possible, a Florida LLC should have at least two members. The second member can be a spouse or relative as long as that person is treated as a legitimate co-owner of the LLC. If the second owner is added merely on paper as a sham, the courts will likely treat the LLC as a single member LLC. To avoid this, the co-owner must pay fair market value for the interest acquired and otherwise be treated as a “real” LLC member–that is, receive financial statements, participate in decision making, and receive a share of the LLC profits equal to the membership percentage owned.
Unfortunately, the majority of real estate professionals create single member LLC’s, but this is an easy fix, and worth the minimal time and money invested in the correction. Call Richards Law Firm, PA to make the change and get your LLC documents in order.