CHARGING ORDER: IS YOUR LIMITED LIABILITY COMPANY PROTECTED AGAINST YOUR PERSONAL CREDITORS

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CHARGING ORDER:

IS YOUR LIMITED LIABILITY COMPANY

PROTECTED AGAINST YOUR PERSONAL CREDITORS

In Florida, the owners of a Limited Liability Company (“LLC”) are called “Members.” The LLC can be either a single-member LLC or a multi-member LLC. The Florida Revised Limited Liability Company Act (the “Act”) makes an important distinction between a single-member LLC and a multi-member LLC. For multi-member LLC’s, the Act makes a charging order the sole and exclusive remedy for a creditor’s right against a member’s interest in an LLC.[1] A charging order constitutes a lien upon the member’s transferable interest and requires the LLC to pay over the judgment creditor a distribution that would otherwise be paid to the member. A transferee of an interest in an LLC is entitled to share in the profits and losses of the LLC, to receive distributions from the LLC, and to receive such allocation of income, gain, loss, deduction, or credit of the LLC to which the assignor was entitled, to the extent of the interest therein.[2]

Conversely, in a single-member LLC, if a judgment creditor establishes that distributions under a charging order will not satisfy the judgment within a reasonable time, a charging order will not be the sole and exclusive remedy, and the court may order the sale of the member’s interest pursuant to a foreclosure sale.[3] The member whose interest is being foreclosed ceases to be a member, and the purchaser becomes the new member of the LLC.[4] Absent an Operating Agreement, the court will have to determine who owns a membership interest in the LLC. The court is likely to examine deposition testimony, filings with the Florida Secretary of State, and tax returns, to make a determination of who owns the LLC’s membership interest.[5] If the court determines that you are the sole member, then your interest may be subject to a foreclosure sale.

One misconception that a layperson has is that the person(s) listed in the Florida Division of Corporations at sunbiz.org are the members or owners of the LLC. Although they may be one and the same, when filing the Articles of Organization, especially if the LLC is manager-managed, only the name and address of the managers and of the registered agent of the LLC has to be furnished. The Operating Agreement is the legal document that lists the members of the LLC, the member’s interest, and the rights and duties of the members. Absent the Operating Agreement, the default rules of the Act will apply to the LLC.

It is recommended for an attorney to review your Operating Agreement and to maintain it up to date. If the LLC has an Operating Agreement, the Florida Statutes provide a lot of flexibility as to how an LLC is to be governed. Contact us if you have any questions relating to this topic or if you need help reviewing or creating an Operating Agreement for your LLC. Protecting you and your business is our main priority. Call us today; we are always happy to help.

[1] Fla. Stat. 605.0503(3).

[2] Fla. Stat. 605.0502.

[3] Fla. Stat. 605.0503(4).

[4] Fla. Stat. 605.0503(5).

[5] See Hage v. Salkin, 2012 WL 718644 (S.D. Fla. Mar. 6, 2012).

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