Real Estate Holding Companies

Why Florida’s Lack of Protection for Single-Member LLCs Should Be A Concern

            One of the most common reasons our Clients form limited liability companies is for asset protection. When properly formed, a real estate holding company should create a barrier between your personal assets and the company’s assets. However, for single-member LLCs in Florida, the barrier is not as strong as you might think.

What is a Single-Member LLC?

A single-member LLC is an LLC with one owner, or “member.”

The Problem in Florida

Florida’s laws do not afford single-member LLCs the same protections as multi-member LLCs.

Most notably, Florida’s legal framework leaves single member LLCs vulnerable in two critical areas:

1. Charging Orders and Creditors:
   • In a multi-member LLC, creditors generally cannot seize company assets to satisfy a member’s personal debts. Instead, they obtain a court-issued “charging order,” which allows the creditor to seize a debtor’s share of distributions from the LLC.
   • In the case of single-member LLCs, Florida courts have ruled that creditors can bypass charging orders and directly access the assets of the LLC.
2. Piercing the Corporate Veil:
   • Courts in Florida are more likely to “pierce the corporate veil” in single member LLCs, allowing creditors to hold the owner personally liable for the business’s debts. This risk increases if the owner fails to maintain clear separation between personal and business finances or uses the LLC for fraudulent or improper purposes.

The result is that the LLC’s assets are vulnerable to the member’s individual debt AND the individual’s assets are vulnerable to the LLC’s debt.

What Can You Do to Protect Yourself?

If you’re planning to incorporate a single-member LLC in Florida, consider the following steps:

1. Maintain Formalities: Keep detailed records and minutes for business activities and maintain completely separate personal and business finances.
2. Consider Adding a Member: Even a nominal membership interest given to a trusted individual can shift your LLC from a single-member to a multi-member structure, increasing legal protections.
3. Consider Incorporating Elsewhere: You may decide to incorporate in a state that offers more robust protections to single member LLCs.
4. Obtain Adequate Insurance: Liability and umbrella insurance policies can provide an additional layer of protection against lawsuits and creditor claims.

Conclusion

While forming an LLC is a popular choice for property owners seeking liability protection, single-member LLC owners in Florida must proceed with caution. Understanding the limitations of the current legal framework and taking proactive steps can help mitigate risks.