Asset Protection with Single Member LLCs in the aftermath of Olmstead

The long awaited decision in Olmstead v. FTC raises questions as to how much the plain language of the various LLC acts apply to single-member LLCs.  Even though LLCs are rooted in partnership law they bear many corporate characteristics (the ability to have just one member being one of them).  But even as the various legislatures allowed LLCs to stray from their partnership roots they did not address the loophole created by allowing partnership protections like charging orders to remain when there is no “partnership”.  Needless to say legal practitioners eagerly embraced this loophole to try to shield assets unconnected with business purposes.  Commentators like Larry Ribstein noted this problem and warned that the legislatures rather than the courts should fix these anomalies.

That horse is now out of the barn.  Olmstead is the latest case where the courts have ignored the LLC Act to allow a creditor to seize the membership interest of a single-member LLC.  At least one commentator has noted that the majority opinion is not a model of clarity and ultimately relies on the difference in the practical effect of the assignment of the entire interest of a member in a single-member LLC as opposed to a multi-member LLC.  The result, as the dissent notes, is that “[d]espite the majority‘s claim that it is not creating an exception to the charging order provision of the statute for single-member LLCs, its analysis necessarily does so in contravention of the plain statutory language and general principles of Florida law.”

Now whether such protections against creditors are justified on policy grounds is a different question entirely.  It is unlikely the legislatures intended to shield the type of conduct alleged in Olmstead.  As noted in other articles in this blog, this is probably another example of legislators amending a statute (to allow single-member LLCs) without making sure that other portions of the LLC Act did not need modification.

Olmstead also stands out because it is the first state supreme court decision to make such a reading of its own LLC Act.  Previous deviations from the plain language of the LLC Acts have come from bankruptcy courts.  Florida is unlikely to be the last state to limit the charging order protections for single-member LLCs.  Next comes a question whether “charging orders [are] intended to be an integral component of an interest in an LLC, rather than merely a remedy.”   The answer to that question will decide whether various state courts respect the charging order protections granted to LLCs formed in other states.

This draws into doubt the common strategy of using single member LLCs to shield assets from creditors.  The efficacy or newer and more exotic creations like Series LLCs (particularly across state lines) is even more doubtful.

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