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Asset Protection Through LLC – An LLC Does Not Always Protect Its Members

By Howard C. Stross
June 03, 2015

This post is about how even though a member of an LLC may believe he or she has asset protection through LLC, a creditor might use the Greenhunter case in pursuit of an individual who is a member of a multi-member LLC established under Florida law. A recent decision by the Wyoming Supreme Court has meaning in Florida for both multi-member limited liability companies (MMLLCs) and one-member limited liability companies (OMLLCs). An OMLLC organized under Florida law has no protection from creditor claims. An MMLLC established under Florida law will have protection if the MMLLC is operated in a business-like manner. In other states, such as Wyoming, an OMLLC will have protection, but the liability protection is not absolute. Anyone who is a member of an OMLLC or MMLLC should note the Wyoming case Greenhunter Energy, Inc. v. Western Ecosystems Tech, Inc., 2014 WY 144, 2014 WL 5794332 (WYO., Nov. 7, 2014).

Asset protection through LLC is afforded only to multi-member LLCs in Florida. A court “charging order” is the only remedy available to a creditor who holds a court judgment against a member of a Florida MMLLC. The creditor cannot disturb the operation of the LLC, cannot levy against the assets of the LLC, and cannot take the interest of the member who is a judgment debtor. The Wyoming Supreme Court case is instructive to MMLLCs. Will Florida creditors try to use the principles of law applied in Wyoming to go after the membership interest of a member of an MMLLC organized under Florida law? If you abide by the guidance provided by the court in the Greenhunter case, doing so may go a long way in deterring creditors from trying to do so.

When one wants to achieve asset protection through LLC, the Greenhunter case emphasizes why all LLCs should maintain proper business and accounting records and have a written operating agreement by which it functions, that is the LLC does not use the Florida Revised Limited Liability Act as its default operating agreement. This case also shines light on the proposition that an LLC’s operating agreement must be drafted with a focus on its organization and operation, particularly when the objective of establishing the LLC is the lawful preservation of the assets owned by the LLC and the member’s membership interest in the LLC.

The Wyoming Supreme Court in Greenhunter noted that contract services were provided by a consulting firm that benefitted an OMLLC. The OMLLC did not pay the consulting firm its $43,000 fee. The Wyoming Supreme Court found it was important that the OMLLC owner benefited personally from the consulting firm’s advice, because following the advice resulted in lowering the member’s personal taxes by using an $880,000 tax deduction from the OMLLC and a $62,000 loss reported by the OMLLC.

The Wyoming Court held the OMLLC owner was liable for the OMLLC’s debt. The statutory laws of Wyoming, unlike Florida, provide for liability protection to a single member of an LLC – but remember even in Wyoming the protection is not absolute. The Wyoming Court noted the member of the OMLLC kept the LLC continually undercapitalized by choice. The member used his positon to control the money transferred to the OMLLC. The member decided what accounts would be paid and when. The member enjoyed tax breaks attributable to the OMLLC’s financial losses. Under Wyoming law until the Greenhunter case, a member of an OMLLC had no responsibility for the OMLLC’s debt that resulted in the OMLLC’s financial losses; however, the Wyoming Court held the single member personally responsible for the payment of the debt to the consulting firm.

A future article will discuss what to do to preserve the protection Florida provides to members of an MMLLC established under Florida law.

If you expect your OMLLC to protect your assets in Florida, you will be disappointed. We may help you fix your OMLLC so it can provide protection. If your LLC has no operating agreement or you are not certain it is up to date so your LLC can use the protection Florida law allows, call (813) 852-6500 to arrange a complimentary consultation in our office.

A future article will discuss what to do to preserve the protection Florida provides to members of a MMLLC established under Florida law.

If you expect your OMLLC to protect your assets in Florida, you will be disappointed. We can help you fix your OMLLC so it provides protection. If your LLC has no operating agreement or you are not certain it is up to date so your LLC has the protection Florida law allows, call (813) 852-6500 to arrange a complimentary consultation in our office.

To learn more about LLC operating agreements, click this link:  An Operating Agreement for Your LLC is Important

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