A Florida limited liability company with only one member, or owner, is called a sole member liability company (“sole member LLC”). Before moving forward with the formation of a sole member, it is crucial to understand how the liability protections in Florida differ for a sole member LLC versus a multi-member LLC.

BEFORE 2010

             The concern is when a creditor who is owed based on a debt incurred by the member and not the business seeks to collect. The fear is that this outside creditor can take title to the member’s interest in the sole member LLC to satisfy a resulting debt collection judgment. The basic understanding before 2010 was that this kind of judgment creditor could only obtain a charging order, and not take title, to satisfy the debt. A charging order results in the member retaining control and ownership but entitles the creditor to the distributions and profits that would otherwise go to the member until the amount due in the judgment is paid and is commonly the sole remedy for an outside creditor.

THE OLMSTEAD DECISION EFFECT

            Judgment creditors no longer were limited to just charging orders after the Olmstead Decision rendered by the Supreme Court of Florida in Olmstead v. Federal Trade Commission, 44 So. 3d 76 (Fla. 2010). 

             The issue in front of the court was whether Florida law permitted a court to order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member LLC to satisfy an outstanding judgment. The Supreme Court determined that the judgment creditor was not limited to only a charging order as a remedy as the Florida Statutes only extended this protection to corporations and not limited liability companies. Additionally, the court went onto state that the purpose of the statute limiting the collection remedies to a charging order was to protect the other members, owners, or shareholders who do not owe the debt and should not be subject to a stranger participating in the management of the company. This protection of other members does not exist in a sole member LLC scenario.

THE OLMSTEAD PATCH

         In response, the Florida legislature passed legislation to resolve the panic produced by the Olmstead decision. This legislation is commonly referred to as the Olmstead Patch because it seeks to fix the gap in protection that was intended, but not provided for based on the lack of the term “exclusive” in the Florida LLC statute. The Olmstead Patch created a new subsection within §608.433, which made it clear that for LLCs “having more than one member,” the charging order would be the sole and exclusive remedy. This exclusion of sole member LLCs left them subject to the Olmstead decision as decided.

THE FLORIDA REVISED LIMITED LIABILITY COMPANY ACT SOLUTION

       In 2014, the Florida Revised Limited Liability Company Act went into effect, which was a complete revision of the previous LLC Act. The Revised LLC Act retained the Olmstead Patch and extended the “sole and exclusive” remedy protection to sole member LLCs with a few exceptions. In the case of a sole member LLC, a judgment creditor is not limited to a charging order and can request the sale of the sole member’s interest to satisfy the judgment if the creditor can establish to the court that a charging order is not sufficient to satisfy the judgment in a “reasonable” amount of time.  

SUGGESTIONS

Here are some solutions to the lack of liability protection for a sole member LLC:

•  Convert the sole member LLC to a multi-member LLC. This conversion can be done by adding or joining a member that you trust that has minimal interest. This additional member can be made passive with little to no authority to make big decisions on behalf of the LLC by having the appropriate operating agreement drafted to that effect. 
• Tenancy By the Entireties ownership. This solution involves forming or transferring the LLC ownership from the sole member into the names of the sole member and his or her spouse.  
• Springing Members. Under the Florida Revised Limited Liability Company Act §605.0401(4), a new non-economic member who can assist with management, but is not entitled to distributions can be created upon the happening of an event, such as insolvency or bankruptcy.