Are LLC's Still The Golden Child?
March 13, 2015
Several years ago, Florida enacted amendments to its limited partnership statutes which, among other things, affirmed that a charging lien is a creditor’s exclusive remedy against a debtor’s limited partnership interest, and more particularly, the amended statute states a creditor may not resort to a judicial foreclosure of a limited partnership interest. Subsequently in 2011, the legislature amended Florida’s LLC statute to state that a charging lien is the exclusive creditor remedy against a debtor’s membership interest in a multi-member LLC. However, the new LLC statute permits creditors to use foreclosure and other alternative collection remedies against a debtor’s interest in a single-member LLCs. There is one condition — the creditor must demonstrate that its judgment will not be satisfied in a “reasonable time” from a charging lien on the single-member LLC membership interest.
Under current Florida law, a debtor’s interest in a single member LLC provides little asset protection benefits. New LLCs designed for asset protection should include a least two members, and existing LLCs should add at least one member to restrict creditor’s rights to charging liens.
A common question is whether a second member has to have a certain minimum percentage interest. The Florida LLC statute does not specify a minimum LLC interest, and Florida courts have not addressed this issue. Most attorneys will advise that a second member have at least a 5 percent membership interest in LLC equity, and many attorneys advise a greater minority interest for asset protection planning.
People with existing single-member LLCs may want to convert their LLC to a multi-member LLC. Adding a second member to an existing single-member LLC often raises fraudulent transfer issues. Simply assigning a small economic interest to a second member without fair consideration is reversible as a fraudulent transfer.The initial member may either sell a small economic interest to a new member for reasonable value and convey the interest by assignment, or the initial member may accept new capital from the second member in exchange for an economic interests issued by the LLC.
In 2013 the Florida legislature passed a Revised Limited Liability Act to become effective in January, 2014. The Act revised the definition of an LLC member in Section 605.0401 in a way that makes it easier to add one or more members to an LLC. The new law defines an LLC member as a person who may or may not hold any economic interest in an LLC and who may not be obligated to contribute money or other capital to the LLC.