ASSET PROTECTION: SINGLE MEMBER LLCS MAY NOT FULLY PROTECT ASSETS FROM CREDITORS

Generally, LLCs are the preferred entities over corporations for asset protection. The major advantage is that if an individual member is sued in his or her individual capacity, a judgment creditor may only obtain a “charging order” against the member’s LLC interest. A charging order allows a judgment creditor to get paid only if the other members of the LLC decide to make a cash distribution to the member. This is an advantage over a corporation because a judgment creditor of a shareholder can attach the shares and obtain ownership in the stock of the shareholder including the voting rights of the shareholder.

The Florida Supreme Court recently held that a judgment creditor could obtain an order that required the member of the LLC to surrender and endorse all his or her rights, title and interest in the LLC to the creditor. The creditor then could sell the assets of the LLC in order to collect its judgment. The creditor was the FTC and obtained a 10 million dollar judgment against an individual based on an advanced pay credit card scheme. Florida law in this case, like Arizona’s held laws on asset protection, only allowed a judgment creditor to obtain a charging order against the member of an LLC. However, the Florida Supreme Court held that the charging order rule did not apply to single member LLCs. The court reasoned that without two or more members, the purpose behind the charging order rule was missing. Therefore, the judgment creditor was able to seize the assets of the single member LLCs. Two Bankruptcy courts have used similar reasoning to allow a creditor to disregard the LLC protection.

If you have a single member LLC in Arizona and elected with the IRS to be taxed as a disregarded entity, you may want to add a member to your existing LLC and form any new LLCs with at least two members in order to prevent any erosion to the asset protection available to LLCs. If you are in need of legal assistance for your business, the expert Scottsdale attorneys at Buntrock Law Group can provide you with the professional advice and legal support you need.