Can A Florida Limited Liability Company Be Held Responsible For The Personal Debts Of Its Members?
The most common reason for a person or group of persons to form a limited liability company (LLC) or corporation is to protect their personal assets from business creditors. In other words, if the business is sued, any judgment can only be collected against the assets owned by the business entity itself and not the individual owners.
But what about the reverse? If a member of an LLC has personal debts, can that creditor go after the business? The answer to these questions largely depend on the type of LLC we are talking about. Historically, you needed at least two “members” to form an LLC. But in recent years every state, including Florida, has amended their laws to permit the formation of LLCs with a single member. This allows many self-employed people to form a separate legal entity for their work.
Florida Has Special Rules for Single-Member LLCs
With a multi-member LLC, Florida law limits a creditor’s options for collecting an unpaid personal debt to seeking what is known as a “charging order.” This is basically a lien against the debtor member’s interest in distributions from the LLC. In multi-member LLCs it is common for the company to make periodic distributions of profits to members. With a charging order, a personal creditor can basically claim that money to satisfy the member’s debt.
A charging order does not allow a personal creditor to actually foreclose on the member’s interest or attempt to take a direct role in the LLC’s operations. The reason for this is simple. When an LLC has more than one member, it would be unfair to allow one member’s personal debts to affect the rights and interests of the other members.
But when we are dealing with a single-member LLC, there are no other members to consider. For that reason, Florida law expressly provides creditors with an additional option when collecting a personal debt owed by the sole member of a LLC. If a charging order is insufficient to pay back the debt, the creditor can seek to foreclose on the debtor’s interest in the LLC itself.
In practical terms, this means that the creditor can force a judicial sale of the LLC. If the creditor purchases the LLC at sale, it acquires all of its assets. If someone else purchases the member’s interest, that money must also be used to pay back the creditor. Either way, a foreclosure sale will likely result in the dissolution of the LLC and an end to its business.
Keep in mind, Florida is one of the few states that permit this type of foreclosure sale. If the LLC is legally organized in another state this may not be an option, even if the single-member LLC conducts business in Florida. And again, this option is not available when the LLC has at least two members.
Speak with an HD Law Partners Attorney Today
If you have questions about the best way to protect your business from potential legal liability, or you are involved in a dispute and need representation, the experienced Tampa corporate attorneys at HD Law Partners are here to help. Contact us today to schedule a free initial consultation.