Single-Member LLCs

Single-Member LLCs

Are they worth the paper they are written on?

Cecil D. Smith, JD & Carol H. Gonnella, JD

October 2011

In the asset protection world, LLCs have become the strategy of choice for both business and estate planning.  LLCs are used for asset protection and for discounting of the value of assets in the LLC.  Over the years, many states have statutorily allowed LLCs to be single-member LLCs.  However, several bankruptcy courts have disregarded the statutory creditor protection for single-member LLCs, holding that because the single member has the right to withdraw from or dissolve the LLC, the creditor, stepping into the shoes of the single member has the same rights.  Last June (2010), in the case of Olmstead vs. Federal Trade Commission, the Supreme Court of Florida reached a similar conclusion in its analysis of the Florida LLC creditor rights statute.  Some practitioners feel that the Olmstead case has rung a death knell for single-member LLCs.  The authors believe, however, that the single-member LLC is still alive, and with proper planning, may be the solution for some of our clients.

The Olmstead Court was reviewing the Florida LLC creditor rights statute.  This statute does not provide express language that the charging order is the sole and exclusive remedy, whether it be a multi-member LLC or a single-member LLC.  In essence, the Florida statute states that the charging order establishes a nonexclusive remedy, and by implication a court may order other remedies in addition to the charging order.

If a practitioner wants to use a single-member LLC, he or she must analyze the statutes of several jurisdictions to find one that offers his or her client’s LLC the greatest protection.  First of all, it is important to have a statute that provides that the charging order is the exclusive remedy for a creditor of an LLC member.  There are now many states providing this exclusive remedy.  Secondly, it is wise to select a jurisdiction whose state statutes (a) specifically prohibit the court from ordering any other remedies, and (b) a statute that specifically precludes a creditor from having the rights of a judgment debtor, and (c) precludes the creditor from examining the books and accounts of the LLC.  States providing this additional protection are Alaska, South Dakota and Wyoming.  Thirdly, it is critical to choose a jurisdiction that specifically states that the charging order is the exclusive remedy not only for multi-member LLCs, but also for single-member LLCs.  There is only one state in the country that has this language in its statute.  That state is Wyoming.  There is precedent for this as the Cook Islands’ statute also incorporates single-member LLCs when referencing the charging order as the exclusive remedy.

Until the Wyoming statute is tested, the authors believe that the multi-member LLC is still the preferred structure.  However, there are instances where the single-member LLCis appropriate, and these instances may include the following:

  1. The Business Owner, such as a Contractor or the Owner of any Business.  When a person wants to protect assets owned outside the LLC from lawsuits occurring inside the LLC.
  2. The Landlord.  When a person who owns rental property wants to protect his or her individually owned investments outside the rental property from lawsuits resulting from an accident on the rental property, which can be owned by an LLC.
  3. The Owner of S-Corp Shares.  When the client owns S-Corp stock and wants the stock owned by an LLC (for asset protection not provided by the corporation) the LLC must be a single-member LLC deemed to be a disregarded entity.  If the S-Corp stock is transferred into a multi-member LLC, the S-Corp will lose its S Election.  The authors think the Wyoming LLC statute that provides asset protection for S-Corp shares provides a great planning opportunity.
  4. The Lonely Client.  When the client has no other person or entity to name as the second member of the LLC.

In conclusion, the authors feel that the law is not settled with respect to the degree of asset protection provided by LLCs; thus, they are not bullet proof. LLCs can be used, however, to put our clients in a much better bargaining position than if they had done nothing.

Cecil and Carol have been teaching and writing together for 16 years.  They teach advanced estate and asset protection planning strategies to other estate and asset protection planning attorneys, and have contributed to or coauthored several books on estate and asset protection planning.  Their latest books are:  Don’t Make the BIG IRA MISTAKE (which they coauthored with CPA Robert Keebler of Green Bay, Wisconsin) and The Wyoming LLC Manual.

 

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