What States Protect Single Member LLCs?
What states protect single member LLCs? As it turns out, definitions for both “limited” and “liability” vary, depending on the state of incorporation. Some state courts have improved protections over the years for for single member LLCs, while other states consider rulings for possible changes in statutes.
In comparison to sole proprietorships and corporations, Limited liability companies (LLCs) haven’t been around that long. Wyoming was the first state to offer LLCs, and didn’t do so until 1977. Protection issues generally are due to original definitions in the laws related to member (owner) assets, debts, and actions of other members. When an LLC has no other members (single-member), protections can vary by state.
Protection for Multi-Member LLCs in All States
The basic protections are the reason for the existence of the LLC business structure. All states offer one or more of three remedies for creditors of any member of a multi-member LLC:
- Charging Order – A Charging Order is a court order for the LLC to pay the creditor money owed by the member. The money comes from assets of the LLC that would otherwise be distributed to the debtor-member.
- Ownership Foreclosure – the creditor can foreclose on the LLC ownership interest of the debtor member.
- Dissolve the LLC – the creditor can get a court order to dissolve the LLC completely. This is the most severe remedy and only available in a handful of states.
Many states limit creditors of members in multi-member LLCs to a single remedy – the Charging Order. This prohibits creditors from taking over a member’s interests or have the LLC dissolved.
Single-Member LLC Protections Vary Even More
The Charging Order, the most commonly used remedy for creditors of multi-member LLCs, is virtually useless for single-member LLCs. This is because the Charging Order exists to protect other members from the actions of one of a single member. As there is only one member in a single-member LLC, some states don’t even allow Charging Orders for single-member LLCs.
Some state courts are currently amending protections for single-member LLCs. Protections are evolving with the popularity of the LLC structure and more single-member LLC businesses. Examples of some state amendments are:
- More protection – Delaware, Nevada, and Wyoming laws state that the Single-member LLC (SMLLC) is entitled to the same protections as the multi-member LLC. These states encourage the formation of new businesses through these laws and are popular states for new LLC formation. They offer some of the best privacy measures and, in the case of Wyoming, don’t cost much to set up.
- Less protection – Florida and New Hampshire are examples of states with laws allowing more than just the Charging Order as remedies for creditors. Creditors have access to one or both of the other remedies above.
When it comes to filing a personal bankruptcy, the federal bankruptcy court does not recognize special protections for SMLLC owners. In a Chapter 7 bankruptcy, the trustee can assume the owner’s rights in the LLC.
The LLC and Piercing the Corporate Veil
No state law provides much, if any, protection if a creditor can prove the owner(s) created the corporation to fraudulently escape liability. In this case, creditors may “pierce the corporate veil” and ask that a court ignore the limited liability and hold the owners or directors personally liabile for actions or debts of the business.
Single- or multi-member LLCs are both subject to loss of all protection when piercing the corporate veil. If or when creditors are looking for ways to get to your assets, they may find some way in which you have not adhered to the terms of your LLC Operating Agreement, or if your Operating Agreement is riddled with errors.
Some people get into trouble using boilerplate LLC Operating Agreements with language that isn’t clear as to whether the business is a single- or multi-member LLC. As with all legal matters, you should consider hiring an attorney to avoid potential issues in the future.
5 Examples of Evolving Laws for Single-Member LLCs
As we’ve described above, laws and liability protections are evolving, and vary state-by-state. Here are just five examples of laws specific to single-member LLCs vs. multi-member LLCs.
California Single-Member LLC Specifics
California doesn’t differentiate between single-member and multi-member LLCs. But California courts draw a distinction if a California single-member LLC does business or owns property in another state. In this case, California may provide less protection.
Florida Single-Member LLC Specifics
In 2014, Florida amended its LLC laws to clarify that a charging order isn’t the only remedy a creditor may use against the assets of the single-member LLC owner. The judgement creditor must first obtain a charging order and attempt to enforce it.
If use of the charging order is not successful within a reasonable time, a creditor may be able to obtain a court order to sell the owner’s interest at a foreclosure sale. The creditor, unlike in many states, gets the entire owner’s interest in the LLC. In other states they would only get the right to receive distributions. The foreclosure buyer becomes the new owner of the single-member LLC. They can operate it, sell assets, or dissolve it. The debtor is no longer in the business picture.
Nevada Single-Member LLC Specifics
Nevada, in an effort to be more business-friendly, provides the same charging order only protection to single-member LLCs. Nevada’s amended statute went into effect in 2011, and it’s since become a popular state for single-member LLCs.
New York Single-Member LLC Specifics
New York law doesn’t limit the remedies just a charging order. The creditor can use all three remedies: charging order, foreclosure, and dissolution.
Texas Single-Member LLC Specifics
Texas doesn’t make any distinction between protections of single- and multi-member LLCs. Nolo.com in the article titled “LLC Protection for Members’ Personal Debt in Texas” states: “However, this is an unsettled and evolving area of the law. If you are really concerned about protecting the assets in your SMLLC against personal creditors, you might want to consider adding another member to your Texas LLC.”
Protections for single-member LLCs vary by state and current laws continue evolve. Generally, a multi-member LLC offers greater protections, so if you find limited protections for a single-member LLC, consider adding a second or additional members.
Consult with an attorney as you determine which legal structure suits you best. Consider the risks in your business, plans for expansion and possible debt, and legal liabilities. You should also review potential tax implications with your accountant or tax advisor.