Fast, Professional Florida LLC
Single-Member LLC in Florida
Entrepreneurs in Florida often want to start their own business without a business partner. It is possible to form a Florida single-member LLC.
What is a Single Member LLC?
An LLC is preferred over a corporation for all new businesses, but especially for businesses with just one owner (known as a “member”) since an LLC is simpler to operate does not require the formalities of a corporation. A Florida LLC is not required to have any more than one member and that member can also be the LLC’s manager. A business owner who forms an LLC for his business instead of operating as a sole proprietorship by default also protects the business owner’s personal assets from the business’s liabilities. The single-member LLC member also has the flexibility to bring on new members or managers should the business grow without filing any documents with Florida. A single member LLC Is a disregarded entity for tax purposes, but the member has the option to be taxed as a corporation.
Choosing Florida vs. Delaware
Florida business owners choose to form in their home state for many of the same reasons people choose to form LLCs in Delaware. Like a Delaware LLC, the managers and members of a Florida LLC are not liable for the debts of the business simply due to being a member or manager, although this protection has come under attack in recent years in Florida courts. Florida residents who are Florida LLC members benefit from Florida’s lack of personal income tax since LLCs are treated as pass through entities by default for tax purposes and income is declared on the members’ personal tax returns.
However, all single member LLCs that intend to do business in Florida should be formed in a more favorable state, such as Delaware. By forming the LLC in Delaware, you can import Delaware law to Florida. Even though the operations and headquarters are in Florida, the internal asset protection of the LLC will be governed by Delaware, the state of formation.
The reason Florida is not favorable to the single-member LLC is because of a court case. The court ruled Mr. Olmstead, who was the single member of a Florida LLC, was not entitled to protection of the Florida LLC based on exceptions and limitations in Florida LLC law. The business assets then were made available to Mr. Olmstead’s personal creditors. This is a case of bad facts making bad law. The result should have been different and more in Mr. Olmstead’s favor if he had used a Delaware LLC. Nevertheless, the way to avoid this result in the future is to learn a lesson from Mr. Olmstead and do what he did not do, form a Delaware LLC for your business operating in Florida.
One of the main reasons to use a limited liability company is asset protection. Under the charging order remedy, a judgment creditor of a member is not allowed to take title to the member’s interest in the LLC. In addition to the charging order remedy, Florida also allows a creditor of a single-member LLC to foreclose on the assets of the LLC. If a creditor judicially seizes the member’s LLC interest, through the remedy of foreclosure, then the creditor can control and liquidate the company. In Delaware, a charging order is the exclusive remedy of the creditor. About fraud, foreclosure is not an available remedy of a Delaware LLC, no matter where it operates. The charging order only gives the creditor a lien on distributions without any control rights or the ability to foreclose and liquidate. The charging order requires distributions from the LLC, intended for the debtor member, to be redirected to the creditor directly. This is not desirable to the creditor because, payments to the creditor are not assured since the manager of the LLC decides when distributions will be made. Under a charging order, the creditor has only a financial lien and has no ownership of the LLC. The manager could “starve” or “freeze out” the creditor instead of making distributions. The creditor with only a charging order may not participate in the management of the LLC. Delaware LLCs used in Florida are favored for asset protection. With a Delaware LLC, the charging order is the exclusive remedy of a creditor.
In the case of Olmstead v. FTC, the Supreme Court of Florida ruled that the judgment creditor of the single-member Florida LLC could seize on the debtor’s entire right, title and interest. The Florida LLC statute was reviewed in court and in execution of judgments, gives the creditor the right to the debtor’s assets. The court concluded that ownership interests in the Florida LLC can be foreclosed upon and the company can be liquidated.
Even after Olmstead, the Florida legislature refused to fix the law to allow a single-member LLC to have charging order protection. It only clarified that multi-member Florida LLCs would receive the charging order protection. As a consequence, single-member LLCs organized in Florida still do not have the protection of the charging order. Therefore, anyone who wants to use a single-member LLC in Florida should form it in Delaware and qualify the Delaware LLC to do business in Florida. It is good for Delaware single-member LLCs operating anywhere across the United States and around the world. Delaware law mandates the charging order as the exclusive remedy of the creditor.