A few weeks ago as part of my regular keep-up-to-date legal
reading, I read a new case: Olmstead v.
FTC. In the case, the Florida Supreme
Court decided that a creditor who held a judgment against the only member of a
limited liability company could gain control of the LLC and use the LLC assets
to satisfy the judgment.
Since the case was decided in a way that I and many other business
lawyers had long believed was the law, it didn't appear to me to be an earth
shattering decision.
To my surprise over the past couple weeks, I've heard a lot
of people mention the case - all of them thinking it was a bad thing for
business owners.
One person even said he believed the case did away with the
protections of the LLC business entity.
Another was in the process of converting all of his LLC entities into
corporations.
To set the record straight I want everyone to know that the
sky is not falling in on limited liability companies.
If you're a member of a multi-member LLC, you're still
protected from the creditors of your co-members.
If you're a member of a single member LLC, there are some
things you should do.
Multi-member LLC's are still protected because the creditor
of any one member cannot step in and take control of the debtor's membership
interest. Instead, that creditor can
only get a charging order - a much more limited remedy.
This is because the LLC is treated as a close association of
the members. Usually, the LLC members
have the right to participate in the management of the LLC business, but don't
have the right to freely transfer a membership interest.
As a result, the law protects the rights of the members to
be in business with those they chose - i.e., not the creditor.
The difference with the Olmstead
case is that it involved single member LLC entities. When there is only one owner, the protection
afforded the "close association of owners" is not necessary.
A little background might be helpful.
Olmstead and Connell were sued by the FTC for unfair and
deceptive trade practices. The FTC
secured a $10 million judgment against them for restitution and took action to
collect it. In tracking down their assets,
the FTC discovered several Florida
limited liability companies where either Olmstead or Connell was the only
member.
When the FTC tried to force Olmstead and Connell to turn
over the membership interests in those LLC's, Olmstead and Connell claimed
their membership interests were protected and could not be attacked by the FTC,
except through a charging order.
The court correctly decided that a creditor can levy on an
LLC interest where there is a judgment against the sole member of an LLC. Because there are no other members and,
therefore, no close association, to protect, the ability to levy on the
interest should not be limited.
If you're a member of a single member LLC, what does this
mean for you?
Well, you may want to consider admitting another member to
secure the "close association" protections against member creditors. Of course, this has to be done in a way that
doesn't cause tax problems. It also
means the operating agreement must be carefully thought out for issues such as,
selling the business, voting rights, and management rights.
Upcoming Events:
August is a busy month for Entrepreneurship Law Firm. Thursday, August 12th, I'll be giving a talk on "Exit Planning for Closely Held Businesses" at the UCF Technology
Incubator. I've got some interesting
data on business sales that will shock most business owners. It'll show why business exits can't be left
to chance without a crushing effect on business owner wealth.
On August 26th
we'll be participating with a table top at the Entrepreneurship Fair at the Disney
Entrepreneur Center. The fair runs
from 1 p.m. to 7:30 p.m. So come by and
see us in the sponsor/vendor area.
Finally, on August 31st
Entrepreneurship Law Firm is sponsoring the Orlando, Inc. (Greater Orlando
Chamber of Commerce) Business Intelligence Series event "The New Normal - Moving Forward in the New Economy" featuring Dr.
Martin Regalia, Chief Economist and Senior Vice President, U. S. Chamber of
Commerce as well as Mark Wilson, President, Florida Chamber of Commerce. I'm excited about this event because this is
critical information that every business owner needs to know to plan for the
future.
Links to these events are below. Attending these events will be valuable to
your business.
Ed
