A recent Florida Supreme Court decision, Shaun Olmstead, et al. v. Federal Trade Commission, is the latest case in a string of cases involving a few state Courts that have held that a sole member LLC does not receive charging order protection from creditors. A charging order restricts a creditor from obtaining the debtor’s LLC voting interest or the LLC property. The charging order only allows the creditor to receive whatever income the debtor would receive. The theory for charging order protection is that it is unfair to the other LLC members (or in the case of a Partnership, the partners) to allow an outside creditor to take ownership of a debtor-member’s LLC interest. Charging order protection applies to LLCs and Partnerships but not to owners of corporations. Therefore, besides being estate planning tools, LLCs and Partnerships are often used for asset protection.
However, according to the Florida Supreme Court and a few other state Courts, if there is only one LLC member the charging order protection should not apply. Sole member LLCs do not enjoy creditor protection in Virginia. Other states, such as Wyoming, have statutes to protect even sole member LLCs.
A second issue is even if the LLC has more than one member whether the state in which the LLC is created provides that the charging order is the "exclusive" remedy or whether it is possible a creditor could seek other relief in addition to the charging order. Virginia is an exclusive remedy statute state. Part of the problem in Olmstead was that there was some confusion whether Florida had an exclusive remedy statute applicable to sole members.
Thus, the prudent course for those concerned about asset protection is to always have more than one LLC member and use a state that has an exclusive remedy statute.