LLC Answers

Today, a well know legal professor (expert in business organizations law) filed a brief in a landmark Florida case that addresses a fundamental single member LLC matter. If the court agrees with his position, this could mean the definitive end to any charging order protection for the single member LLC.

State LLC laws have never differentiated between a limited liability company that has one member and one that has multiple members when it comes to liability protection.  It is well recognized that every LLC provides a layer of protection stating that owners are not personally liable for business liabilities merely because they are owners.  This is known as forward liability protection.

However, an LLC in most states also offers what is known as reverse liability protection or charging order protection.  This protection basically states that if a member is personally sued for a non-business related obligation and is found liable, the creditors cannot take full ownership of the member’s LLC interest in the LLC.  The creditor’s rights are limited to the economic interests.  In effect, this allows the member to retain the control he had in the LLC business.

The philosophy behind the charging order is not really to give protection to the liable member but to protect other owners of the LLC from business disruption and problems.  They should not fall victim to one member’s personal liabilities by having to deal with an unknown creditor coming in and affecting the business by having management or voting rights.

Now this reasoning does not really apply in a single member LLC context because there are no other members to protect.  A well known bankruptcy court has nullified charging order protection in a single member LLC in the context of a bankruptcy.  While conservative legal practitioners interpreted this ruling to mean there is no longer charging order protection for a single member LLC, the ruling technically applied in only a bankruptcy context.

However, this Florida case addresses the matter in a non-bankruptcy circumstance and so its conclusions will have significant ramifications and applicability in the general area of LLC protection.

More details can be found at this link:

http://www.wmitchell.edu/news/articles/default.asp?articleId=11766&story=Professor-Kleinberger-files-brief-in-landmark-Florida-single-member-LLC-asset-protection-case