During the 1990’s, limited liability companies (“LLCs”) were created as an alternative limited liability vehicle to corporations and limited partnerships, offering its owners limited liability protection from creditors of the LLC. Over the past decade, LLCs became for many the entity of choice for several reasons, including offering its members’ an element of asset protection by limiting the remedy of
creditors’ arising outside of the LLC to a charging order against a member’s interest in the LLC.
Under Florida corporate law, a creditor’s remedies include foreclosing and taking ownership of the shares of a debtor’s corporation. Alternatively, a charging order provides a creditor only with the right
to receive distributions payable to the member/debtor from the LLC, to the extent such distributions are authorized. Charging order protection allows the member of the LLC to continue ownership of
the membership interest and to control operations of the business without interference by the creditor. The creditor has no authority to exercise management rights, inspect or copy business records,
or vote on business matters. In addition, there is also the possibility that the creditor will be allocated the tax burden associated with its rights to distributions, also known as phantom income, generally unappealing for a creditor.
While Florida partnership law also limits a creditor’s remedies to a charging order, a partnership by definition requires two owners, while an LLC can exist with a single-member, allowing more flexibility to
sole proprietors desiring limited liability protection. The first attack on single-member LLCs came in 2003, when a federal judge in Colorado caused an avalanche of precedent by denying charging order
protection for single member LLCs and allowing a bankruptcy trustee to take possession of a single-member LLC’s assets to benefit creditors. Since Colorado’s erosion of the offered protection, federal bankruptcy courts in Idaho, Maryland and Minnesota have exercised powers denying charging order protection for single-member LLC owners, albeit in the bankruptcy context.
Over the years, Florida courts have consistently ruled that a charging order is a creditor’s exclusive remedy against a member/debtor’s membership interest in an LLC; however, on June 24, 2010, the
Florida Supreme Court changed the rules in Olmstead v. Federal Trade Commission. Olmstead involved a single-member LLC, and the Florida Supreme