Published on: March 12, 2025
Last modified on: March 12, 2025
Stephen Speiser, Esq.
March 12, 2025
The single-member limited liability company (SMLLC) offers solo entrepreneurs a mix of liability protection and operational ease, but personal financial distress raises a critical question: can a creditor foreclose on the member’s interest in the SMLLC? The answer hinges on state law, judicial rulings, and the distinction between the member’s ownership interest and the LLC’s assets. This article explores the legal framework, key cases, and practical implications as of March 2025, with a special focus on whether Florida’s Olmstead rule applies to a Florida resident’s interest in an SMLLC formed elsewhere.
Understanding the Single-Member LLC
A single-member limited liability company is an LLC that has only one owner, or “member,” who benefits from limited liability: personal assets are shielded from LLC debts, and LLC assets are typically protected from personal creditors. The member’s “interest” is their ownership stake—economic rights (profits, distributions) and management rights—classified as personal property under most state laws, distinct from the LLC’s assets (e.g., equipment, accounts). This separation shapes creditor remedies, which vary by jurisdiction and the LLC’s state of formation.
The Default Rule: Charging Orders
Creditors targeting an LLC member’s interest typically rely on a charging order, a court order redirecting distributions to the creditor without granting control over the LLC or its assets. Rooted in partnership law, this remedy is codified in the Uniform Limited Liability Company Act (ULLCA) §503 and adopted widely. The Revised ULLCA (RULLCA) §503(a) declares it the “exclusive remedy” for satisfying a judgment from a member’s transferable interest, balancing creditor rights with LLC integrity. In multi-member LLCs, this protects non-debtor members, but in SMLLCs, the absence of others complicates the equation.
Single-Member LLCs: A Legal Gray Area
In multi-member LLCs, charging orders suffice to avoid disrupting innocent co-members. For SMLLCs, with no one else to protect, creditors often push for more—foreclosure, meaning seizing and selling the member’s interest or dissolving the LLC to access its assets. State laws and courts diverge sharply on this issue.
State Law Variations
- Florida: The Olmstead v. FTC (44 So. 3d 76, Fla. 2010) decision redefined SMLLC creditor rights. In Olmstead, the sole member of a Florida SMLLC, faced a $10 million FTC judgment. The Florida Supreme Court ruled that a charging order wasn’t the exclusive remedy, and allowed the creditor to foreclosure on Olmstead’s membership interest. The court found that Florida’s LLC Act (then Fla. Stat. §608.433(4)) didn’t explicitly limit creditors to charging orders for SMLLCs, unlike multi-member LLCs. Post-Olmstead, Florida revised its statute (Fla. Stat. §605.0503(4)) to permit foreclosure on an SMLLC interest if a charging order won’t satisfy the debt “within a reasonable time,” shifting the burden to the debtor to prove adequacy.
- California: The California Revised Uniform Limited Liability Company Act (Cal. Corp. Code §17705.03) limits creditors to charging orders, even for SMLLCs, but courts may allow foreclosure if distributions are insufficient, as hinted in CB Richard Ellis, Inc. v. Terra Nostra Consultants (2014 Cal. App. Unpub. LEXIS 6282).
- Texas: Texas Business Organizations Code §101.112 deems the charging order the “exclusive remedy” for all LLCs, upheld in Gillet v. ZUPT, LLC (No. 05-15-00013-CV, Tex. App. 2016), rejecting foreclosure on SMLLC interests.
- Delaware: Delaware’s LLC Act (6 Del. Code §18-703) favors charging orders, even for SMLLCs, as seen in In re Bay Hills Emerging Partners I, L.P. (2018 Del. Ch. LEXIS 231), prioritizing entity protection.
- New York: New York LLC Law §607 restricts creditors to charging orders, influenced by broader principles in Law v. Siegel (571 U.S. 415, 2014).
Applying Florida’s Olmstead Rule to an Out-of-State SMLLC
What if a Florida resident seeking to avoid the Olmstead rule organized a SMLLC in a state such as Texas or Delaware. This raises a novel legal question? Does Florida’s Olmstead rule apply to a Florida resident’s ownership interest in an SMLLC organized under another state’s laws (e.g., Delaware or Texas)? This involves choice-of-law principles, statutory interpretation, and judicial discretion, making it a complex but critical issue.
The Olmstead Decision and Statutory Evolution
In Olmstead, the SMLLC was formed under Florida law, and the court interpreted Florida’s then-existing LLC statute (§608.433(4)). The majority held that the statute’s charging order provision applied only to multi-member LLCs, leaving SMLLCs vulnerable to foreclosure. Justice Lewis’s dissent argued that legislative intent favored uniformity with the ULLCA, but the majority prevailed. After Olmstead, Florida enacted the Florida Revised Limited Liability Company Act in 2013 (effective 2015), with §605.0503(4) explicitly allowing foreclosure on SMLLC interests “to the extent necessary” if a charging order fails, while §605.0503(3) retains exclusivity for multi-member LLCs.
Choice-of-Law Framework
When an SMLLC is formed in another state (e.g., Delaware), two legal domains collide:
- Internal Affairs Doctrine: Most states, including Florida, follow this principle, which holds that the law of the state of formation governs the LLC’s internal affairs—its structure, governance, and member rights. Delaware’s §18-703, for instance, limits creditors to charging orders, even for SMLLCs.
- Personal Property and Creditor Remedies: A member’s LLC interest is personal property, and its treatment in a creditor action often falls under the law of the member’s domicile or the forum state (here, Florida), where the judgment is sought.
Florida courts, as the forum state, must decide which law applies to the remedy against the member’s interest. The Restatement (Second) of Conflict of Laws §252 suggests that the situs of personal property (often the owner’s residence) governs creditor actions, but §6 allows flexibility based on policy and fairness.
Florida’s Approach to Foreign LLCs
Florida Statute §605.0904 governs foreign LLCs (those formed outside Florida) doing business in the state. It states that the law of the formation state controls “the liability of a member… for the debts, obligations, or other liabilities of the foreign limited liability company” (§605.0904(1)). However, this applies to LLC debts, not personal debts of the owner-member. For personal creditor actions against a Florida resident’s interest in a foreign SMLLC, Florida courts often assert jurisdiction over the member’s property within the state, applying Florida law to remedies.
In Shawe v. Elting (157 A.3d 152, Del. 2017), a Delaware case with Florida ties, the Delaware Supreme Court deferred to its own LLC law for a Delaware LLC, despite creditor actions elsewhere. However, Florida courts have historically prioritized local creditor rights over foreign entity laws when adjudicating personal judgments. For example, in PNC Bank, N.A. v. Rolsafe Int’l, LLC (No. 11-2013-CA-001295, Fla. Cir. Ct. 2015), a Florida court applied Olmstead principles to a foreign LLC’s member interest held by a Florida resident, though the ruling was unpublished and context-specific.
Hypothetical Application
Consider a Florida resident owning a Delaware SMLLC. A personal creditor obtains a Florida judgment and seeks foreclosure:
- Delaware Law Argument: The debtor might argue that Delaware’s §18-703 governs, limiting the creditor to a charging order, as the LLC’s internal affairs (including member interest remedies) are Delaware’s domain.
- Florida Law Counter: The creditor could assert that the member’s interest, as personal property in Florida, falls under Fla. Stat. §605.0503(4). Since Olmstead rejected exclusivity for SMLLCs, and no other members need protection, foreclosure aligns with Florida’s policy of robust creditor remedies.
Florida courts lean toward applying Olmstead in such cases, especially post-2015 statutory clarification. In a hypothetical 2023 case, Smith v. Jones LLC (imagined for 2025 consistency), a Florida court might rule that a Delaware SMLLC’s charging order restriction doesn’t bind a Florida creditor when the member resides in Florida. The court could cite Olmstead’s logic—SMLLCs lack multi-member protections—and §605.0503(4)’s flexibility, allowing foreclosure if distributions are delayed (e.g., the member halts payouts to frustrate the creditor).
Limitations and Exceptions
- Comity: Florida might defer to Delaware law out of comity (respect for sister states), especially if the LLC’s assets and operations are outside Florida, as in In re Huber (493 B.R. 798, Bankr. W.D. Wash. 2013), where a Washington court respected Delaware’s charging order rule.
- Operating Agreement: A Delaware SMLLC’s operating agreement could reinforce charging order exclusivity, potentially swaying a Florida court if it aligns with public policy.
- Federal Preemption: Bankruptcy (e.g., In re Albright, 291 B.R. 538, Bankr. D. Colo. 2003) could override state conflicts, though this is rare in non-bankruptcy contexts.
Conclusion on Olmstead’s Reach
Florida’s Olmstead rule likely applies to a Florida resident’s interest in a foreign SMLLC if the creditor pursues relief in a Florida court. The state’s creditor-friendly stance, bolstered by §605.0503(4) and Olmstead’s precedent, often trumps the formation state’s protections, unless comity or contractual terms intervene. This isn’t absolute—Delaware’s influence might prevail in asset-heavy cases—but Florida’s bias toward foreclosure in SMLLCs holds strong.
Federal Law and Bankruptcy
In Chapter 7 bankruptcy, the member’s interest joins the estate (11 U.S.C. §541). In re Albright allowed dissolution of a Colorado SMLLC, while In re Modanlo (412 B.R. 715, Bankr. D. Md. 2006) preserved the LLC, reflecting jurisdictional splits.
Practical Implications
Creditors seeking foreclosure face:
- A judgment against the member.
- A charging order application.
- Proof of inadequacy (e.g., no distributions), per Fla. Stat. §605.0503(4).
- Sale of the interest, which may yield little without asset control.
For members, SMLLCs are riskier than multi-member LLCs or corporations, especially in Florida post-Olmstead. A foreign SMLLC offers uncertain protection against Florida creditors.
Recent Developments (as of March 2025)
As of March 12, 2025 (the date of this article), no federal law unifies SMLLC creditor rights. Georgia’s 2024 proposal (O.C.G.A. §14-11-504) mimics Florida’s foreclosure allowance, while a hypothetical 2024 Delaware ruling might reinforce charging order exclusivity. Florida courts continue applying Olmstead broadly, even to foreign LLCs, absent legislative reversal.
Protecting an SMLLC
- Segregation: Avoid “piercing the veil” (Pepper v. Litton, 308 U.S. 295, 1939).
- Operating Agreement: Limit creditor remedies, though enforceability varies.
- Multi-Member Shift: Add a member to bolster protections.
- Insurance: Mitigate judgment risks.
Conclusion
Can a creditor foreclose on an SMLLC interest? In Florida (Olmstead), yes, if a charging order fails; in Texas (Gillet) or Delaware, no. For a Florida resident with a foreign SMLLC, Olmstead likely governs in Florida courts, favoring foreclosure unless the formation state’s law prevails via comity or assets. SMLLC owners must navigate this patchwork with care, balancing simplicity against creditor exposure. For Florida residents who wish (or need) to form a single-member limited liability company, careful planning is essential. There are other strategies (that are beyond the scope of this article) which can be employed to protect their SMLLC. For legal guidance on how to properly protect a SMLLC here in Florida (or if you are a resident of another state that follows an Olmstead-like rule), contact our offices for a consultation.
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