Last updated: 7/27/2016
This article covers what actions judgment creditors are allowed to take under Florida's limited liability company (LLC) law against a Florida LLC for an LLC owner's personal debt. Unlike most states, Florida treats creditors of a single-member LLC (SMLLC) differently than creditors of multiple member LLCs. SMLLC owners receive much less protection from personal creditors than owners of multi-member LLCs.
When it comes to multi-member LLCs, Florida is like most states. The general rule is that the money or property of a Florida multi-member LLC cannot be taken by creditors to pay off the personal debts or liabilities of the LLC's owners.
Example: Sarah, Eli, and Payton form a Florida LLC to sell scuba diving equipment. It turns out that Eli owes $10,000 to Jack, a former business partner, who sues him in court and obtains a judgment against him. While Jack can attempt to collect on his debt from Eli's personal assets, he cannot take money or property owned by the LLC to satisfy Jack's personal debts. For example, he cannot get any of the money held in the LLC's bank account.
However, there are other ways that creditors of an LLC owner might try to collect against the LLC for the owner's debt. These include:
1) obtaining a charging order requiring that the LLC pay the creditor all the money due from the LLC's payments to the debtor-owner
2) foreclosing on the debtor-owner's financial rights in the LLC, or
3) getting a court to order that the debtor-owner's entire LLC interest be turned over or assigned to the creditor so that the creditor becomes full owner of the LLC interest.
Florida, like all states, permits personal creditors of an owner of a multiple-member Florida LLC to obtain a charging order against the debtor-owner's membership interest. 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. Like most states, creditors in Florida only obtain the owner-debtor's financial rights with the charging order and cannot participate in the management of the LLC. Thus, the creditor cannot order the LLC to make a distribution subject to its charging order. Frequently, creditors who obtain charging orders end up with nothing because they don't have the right to order distributions and the LLC member or members refuse to make any.
Example: Eli has only $500 in his bank account and no valuable personal property. The only thing of value he owns is his 33% interest in the successful scuba shop. However, Jack, his creditor, cannot just take over his LLC ownership interest or have it sold. All he can do is get a Florida court to issue a charging order. This means that any distributions of money or property the LLC would ordinarily make to Jack must be given to Jack's creditors instead until the entire $10,000 debt is paid. However, if there are no distributions there will be no payments.
This makes the charging order a weak remedy for a creditor. However, a charging order is not necessarily toothless. The existence of a charging order can make it difficult or impossible for an LLC owner-debtor to take money out of the LLC business without having to pay his or her judgment creditor first. To avoid this problem, the debtor and his or her fellow LLC members may seek to settle (pay-off) the debt. Of course, whether and to what extent a charging order will result in payment of all or part of a debt depends on the individual circumstances.
Florida's LLC law says that the charging order is the only legal procedure that personal creditors of a Florida LLC with more than one member can use to get at their LLC ownership interest. Thus, unlike some other states, Florida does not permit the personal creditors of a member of an LLC with multiple owners to foreclose on that owner's LLC ownership interest, or get a court to issue a turnover requiring the debtor-member to transfer his or her entire LLC interest to the creditor to satisfy the judgment. This makes Florida a particularly friendly state for people who want to form multiple member LLCs to protect assets from personal creditors.
The reason personal creditors of individual LLC owners are limited to a charging order or foreclosure is to protect the other members (owners) of the LLC. It doesn't seem fair that they should suffer because a member incurred personal debts that had nothing to do with their LLC. Thus, personal creditors are not permitted to take over the debtor-member's LLC interest and join in the management of the LLC, or have the LLC dissolved and its assets sold without the other members' consent.
This rationale disappears when the LLC has only one member. Florida's LLC law was amended in 2014 to recognize this fact: It provides that the charging order is not the only remedy a judgment creditor may use against a SMLLC owner. A creditor must first obtain a charging order. But, if as is typically the case, the order proves ineffective to collect the judgment within a reasonable time, the creditor may obtain a court order that the SMLLC interest be sold at a foreclosure sale. Moreover, unlike in most states, the purchaser of the SMLLC interest at a foreclosure sale obtains the debtor-member's entire SMLLC interest, not just the right to receive distributions. In effect, the purchaser becomes the new sole owner of the SMLLC and can do whatever he or she wants with it, including dissolving it or selling its assets. The debtor ceases to be a member of the LLC. This gives creditors of owners of Florida SMLLCs a very powerful remedy to collect their judgments.
Example: John establishes a Florida SMLLC to own and operate an apartment building. John personally guaranteed a $100,000 bank loan he obtained for another business he owned through a different company. His bank obtains a $100,000 court judgment against John personally and has a charging order placed against his SMLLC. When it collects nothing with that order because John makes no distributions to himself, the bank obtains a court order that the SMLLC be sold at a foreclosure sale. The bank purchases the SMLLC at the sale and is now sole owner of the SMLLC—it now owns the apartment building. John is no longer a member of the SMLLC.
All of the foregoing makes Florida one of the least attractive states in which to form a SMLLC as far as protection from personal creditors goes. To avoid application of Florida's SMLLC 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 SMLLC. 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.
Alternatively, you could form your SMLLC in a state other than Florida that has a more debtor-friendly LLC law. You do not have to form your SMLLC in Florida even if it is the state where you live, do business, or own property. However, there is no guarantee that Florida courts (or other state courts) will always apply the law of the state where you formed your SMLLC, rather than the less favorable Florida LLC law. This is a complex legal issue with no definitive answer. Moreover, forming your SMLLC outside Florida will increase your costs: Your LLC will have to qualify to do business in Florida and pay the same taxes and as any other LLC, as well as the fees to form your LLC in Nevada, Delaware, or another state. Consult an experienced business lawyer for more information.
For more information on LLCs and the limited liability protections they offer, see Limited Liability Protection and LLCs: A 50-State Guide.