Sometimes there is no alternative to a single member LLC, or you just can’t find anyone you trust to be a second member in your business. One example is where a husband and wife establish a LLC owned as tenants by entireties which I believe would be considered a single member LLC (although there is no case on the issue). The LLC may have worked well for some time to protect the LLC interests against the creditors of one spouse, but now the owners unexpectedly confront a joint creditor, and find it difficult to include another member. Is there anything a single member LLC can do to achieve some asset protection.
What about reorganizing the LLC in a state such as Delaware or Wyoming with statutes that protect single member LLCs from creditors because the state law provides the charging lien is the exclusive creditor remedy to attack all LLCs regardless of number of members. I’ve stated previously on this blog that I do not think a Florida court would apply the foreign state’s LLC statute when considering the collection remedies of a Florida creditor against a Florida debtor. I don’t think moving your LLC out of state will work.
Last month I spoke at the Florida Bar’s annual asset protection seminar in Ft. Lauderdale. One of the other speakers, attorney Alan Gassman, suggested a way for a single member LLC to protect itself from its owner’s creditors. Alan said that he writes LLC agreements which appoint the initial manager permanently and state that the members cannot vote to remove and replace the manager. If a creditor or the creditor’s assignee becomes a substitute member he would own an interest in an LLC managed by the initial manager appointed by the debtor. In most cases, the debtor himself would be the permanent manager.
Most agreements give the manager control over the LLC’s assets and its distributions. A creditor that takes over a debtor’s interest in a single member LLC may find itself owning an LLC which it cannot control. This may work. We’ll have to see how it holds up in court. In any event, I think the irrevocable manager is a better solution than moving the LLC to another state.