Supreme Court Wipes Out Asset Protection For Single Member LLCs
Over 2 years ago a case went in front of the Florida Supreme Court. The question of that case was whether single member LLCs provided asset protection such that a creditor of the owner of the LLC could not get at the LLC’s assets.
On June 24th, The Florida Supreme Court answered in the negative. Single member LLCs no longer provide asset protection from claims made by creditors of the LLC owner. The fancy phrase is reverse veil piercing.
The reasoning of the Court was pretty simple. The first statute which might have provided asset protection was as follows, an assignee of a limited liability company interest may become a member only if all members other than the member assigning the interest consent. Read case here.
It’s pretty much common sense that if the LLC has only a single member, there are no, “members other than the member assigning the interest”. Thus no limitation on the creditor becoming the member of the LLC. (By the way some might take the moral of this case to be not to have single member LLCs. They would advice adding your spouse, kids, Uncle Huey etc…. to the LLC so that you would have asset protection. I think that is short sighted and ignoring the writing on the wall.)
The other statute that might have provided asset protection was the statute enabling the much vaunted “charging order” protection. However, since Florida’s LLC statute did not specifically state charging order protection was the sole remedy that failed to protect the debtor as well. Promoters of the effectiveness of the asset protection provided by LLCs might cling to the belief that LLCs are still effective if established in jurisdictions where a charging order is the exclusive remedy available to creditors. However there is already case law in one such jurisdiction saying that even a multi member LLC can be pierced where in theory the exclusive remedy was a charging order.
So what does all this gobbledygook mean to you?
If the linchpin of your asset protection dream is an LLC you better reassess things. Fast. LLCs were not created to serve as a vault to hold your precious assets. LLCs were created as an entity to provide business owners limited liability for the ongoing operations of a business. If you don’t have a business you shouldn’t have a LLC.
The time tested vehicle to provide ongoing asset protection for your assets is the trust. Coincidentally the Florida courts recently handed down a decision giving more asset protection to trusts that observers thought was available. Keep in mind there is a vast assortment of different trust structures, with some providing no asset protection and others providing very strong asset protection. If you want a checkup on the viability of your current plan, give us a call we would love to start a discussion with you.