Limiting the ability for creditors to charging lien to the owner of a Florida LLC is a big concern for many residents. At least two members are required to limit a creditor’s ability to charge a lien, and adding another member to an LLC can be a tricky process.
In Olmstead vs. Federal Trade Commission, the Supreme Court decided the issue of whether a court could order a judgment-debtor to surrender all “right, title, and interest in the debtor’s single-member limited liability company to satisfy a judgment. The Court ruled courts were allowed to do this and reasoned, “that there is no reasonable basis for inferring that the provision authorizing the use of charging orders under section 608.433(4) establishes the sole remedy for a judgment creditor against a judgment debtor’s interest in single member LLC. This case, and other recent bankruptcy cases, have made it clear that a single member LLC is not as safe from creditors as once believed. The best solution to this issue of potential liability is to form a multiple member LLC.
Generally, there are two ways to add another member to an LLC. The LLC owner can allow a third party to invest money in the LLC in exchange for a minority interest. There is no limitation regarding who can serve as the third party, which means a family member or even a spouse can be a third party. What is important is that the share of the LLC given in consideration for the investment reflects a fair value for what is given.
So how is that determined?
We recommend the LLC owner first get an appraisal of the LLC before transferring any interest. This appraisal must establish the LLC’s value fairly so that the interest the third party purchases is equivalent to the portion purchased. The total value of the LLC’s interest should be less than the value of the LLC’s assets. While complicated in theory, this is because a well-established valuation discounts the interest due to factors such as lack of marketability and lack of control afforded the minority interest holder. An appraiser would, for example, value 20 percent of the LLC interest less than the value of 20 percent of the LLC’s underlying assets.
Once the proper value is established, the new member can either buy a portion of the LLC’s interests or purchase interests for a new member. The new member could obtain his interest in exchange for a promissory note to the LLC. However, if the LLC has declared bankruptcy, the purchaser does not want to pay a debtor-member with a note because payments made could be garnished.
Another method to add a second member to an LLC is for the original owner to create an irrevocable trust and name a family member as the beneficiary. The trustee of the irrevocable trust would then be the second member the original LLC owner wishes to add to the LLC. However, if the LLC owner is a debtor-member, the bankruptcy courts could deem the transfer to this trust as a fraudulent transfer.
Finally, it is important to check your operating agreement before adding any members of the LLC. If a change can be made, it must be reflected in the amended operating agreement. Further, the LLC owner must note the change in his or her federal and state tax returns. Florida may also require an amended certificate to reflect the membership change. For more information on how to add a second member of your LLC, contact the Law Office of David Goldman PLLC today.