The Trouble With Single-Member LLCs

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The Trouble With Single-Member LLCs – PART 1

Posted On : Oct-14-2011 | seen (453) times | Article Word Count : 631 |

However, according to Albright, “[a] charging order protects the autonomy of the original members, and their ability to manage their own enterprise. In a single-member entity, there are no non-debtor members to protect.” Accordingly, “[t]he charging order protection serves no purpose in a single member limited liability company, because there are no other parties’.

A limited liability company (“LLC”) is a form of statutory entity commonly used by Seattle Attorneys for its tax benefits, as well as to shield owners from liability for potential debts of the company and to shield assets held by the LLC from creditors of the LLC members. Assuming the LLC is operated legally and not used for improper purposes, assets placed in an LLC are protected from creditors of individual members. While a creditor can still obtain a charging order against a debtor member’s economic interest in the LLC (i.e., the member’s right to receive distributions from the LLC), the creditor cannot touch property held by the LLC and cannot acquire any management rights in the LLC. The LLC form, like that of a corporation, provides a shield against execution by judgment creditors that can only be pierced through misconduct, overreaching, or failure to observe the LLC form. Unless, that is, the LLC is a “single-member LLC”. Court decisions have raised a question as to whether the member’s management rights or even the LLC form must be respected in the case of a single-member LLC. According to the majority of those decisions, the answer is “no”.

While there are no current Washington cases discussing the rights and protections of members and creditors regarding a single-member LLC, commentators have noted that courts are beginning to recognize that single-member LLCs are effectively “alter egos” of their sole members not entitled to the same protections as multiple-member LLCs, and several Seattle Bankruptcy Lawyers have seen bankruptcy court decisions that have treated single-member LLCs differently than they would have been treated if the LLCs had multiple members.

In the case of In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003) (the “Ashley Albright” case), a Colorado bankruptcy court ruled for the first time that the assets of a single-member LLC could be used to pay creditors of the debtor-member who filed bankruptcy. Colorado’s LLC statute is similar to Washington’s statute, granting creditors the right to charge a debtor member’s economic interest in the LLC but treating the charging order as an assignment and requiring consent of all other members to confer any management rights on the charging creditor. Colo. Rev. Stat. § 7-80-703. The requirement of a charging order, under Colorado law (and parallel Washington law), exists to protect other members of an LLC from having to involuntarily share management with someone they did not choose or to have to accept a creditor as a co-manager of the LLC. However, according to Albright, “[a] charging order protects the autonomy of the original members, and their ability to manage their own enterprise. In a single-member entity, there are no non-debtor members to protect.” Accordingly, “[t]he charging order protection serves no purpose in a single member limited liability company, because there are no other parties’ interests affected.” Albright, 291 B.R. at 541. The court further noted:

[T]he Limited Liability Company Act requires the unanimous consent of “other members” in order to allow a transferee to participate in the management of the LLC. Because there are no other members in the LLC, no written unanimous approval of the transfer was necessary…

The charging order limitation serves no purpose in a single member limited liability company, because there are no other parties’ interests affected.

Albright, 291 B.R. at 540, 541.

Based on this rationale, Seattle Bankruptcy Attorneys understood that the bankruptcy court allowed the Trustee, standing in the shoes of the debtor as a hypothetical judgment creditor, to cause the LLC to sell its property and distribute net proceeds to the debtor member’s bankruptcy estate, or distribute the LLC’s property to himself as Trustee and liquidate the property for the benefit of creditors.

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<h1>The Trouble With Single-Member LLCs – PART 1</h1> Author: <a href='http://www.articleseen.com/profile_Charles Drouin.aspx'>Charles Drouin</a> A limited liability company (“LLC”) is a form of statutory entity commonly used by Seattle Attorneys for its tax benefits, as well as to shield owners from liability for potential debts of the company and to shield assets held by the LLC from creditors of the LLC members. Assuming the LLC is operated legally and not used for improper purposes, assets placed in an LLC are protected from creditors of individual members. While a creditor can still obtain a charging order against a debtor member’s economic interest in the LLC (i.e., the member’s right to receive distributions from the LLC), the creditor cannot touch property held by the LLC and cannot acquire any management rights in the LLC. The LLC form, like that of a corporation, provides a shield against execution by judgment creditors that can only be pierced through misconduct, overreaching, or failure to observe the LLC form. Unless, that is, the LLC is a “single-member LLC”. Court decisions have raised a question as to whether the member’s management rights or even the LLC form must be respected in the case of a single-member LLC. According to the majority of those decisions, the answer is “no”.

While there are no current Washington cases discussing the rights and protections of members and creditors regarding a single-member LLC, commentators have noted that courts are beginning to recognize that single-member LLCs are effectively “alter egos” of their sole members not entitled to the same protections as multiple-member LLCs, and several Seattle Bankruptcy Lawyers have seen bankruptcy court decisions that have treated single-member LLCs differently than they would have been treated if the LLCs had multiple members.

In the case of In re Albright, 291 B.R. 538 (Bankr. D. Colo. 2003) (the “Ashley Albright” case), a Colorado bankruptcy court ruled for the first time that the assets of a single-member LLC could be used to pay creditors of the debtor-member who filed bankruptcy. Colorado’s LLC statute is similar to Washington’s statute, granting creditors the right to charge a debtor member’s economic interest in the LLC but treating the charging order as an assignment and requiring consent of all other members to confer any management rights on the charging creditor. Colo. Rev. Stat. § 7-80-703. The requirement of a charging order, under Colorado law (and parallel Washington law), exists to protect other members of an LLC from having to involuntarily share management with someone they did not choose or to have to accept a creditor as a co-manager of the LLC. However, according to Albright, “[a] charging order protects the autonomy of the original members, and their ability to manage their own enterprise. In a single-member entity, there are no non-debtor members to protect.” Accordingly, “[t]he charging order protection serves no purpose in a single member limited liability company, because there are no other parties’ interests affected.” Albright, 291 B.R. at 541. The court further noted:

[T]he Limited Liability Company Act requires the unanimous consent of “other members” in order to allow a transferee to participate in the management of the LLC.  Because there are no other members in the LLC, no written unanimous approval of the transfer was necessary…

The charging order limitation serves no purpose in a single member limited liability company, because there are no other parties’ interests affected.

Albright, 291 B.R. at 540, 541.

Based on this rationale, Seattle Bankruptcy Attorneys understood that the bankruptcy court allowed the Trustee, standing in the shoes of the debtor as a hypothetical judgment creditor, to cause the LLC to sell its property and distribute net proceeds to the debtor member’s bankruptcy estate, or distribute the LLC’s property to himself as Trustee and liquidate the property for the benefit of creditors.About the Author: The Lasher firm’s <a rel="nofollow" href="http://www.lasher.com/">Seattle Lawyers</a> can assist you in formation of LLCs and other business entities, collection of debts, and bankruptcy planning and representation. If you have any questions about this article, please contact Jeff Smoot at (206) 654-2411. Article Source: <a href='http://www.articleseen.com/Article_The-Trouble-With-Single-Member-LLCs-–-PART-1_92192.aspx'> http://www.articleseen.com/Article_The Trouble With Single-Member LLCs – PART 1_92192.aspx</a>

Article Source : http://www.articleseen.com/Article_The Trouble With Single-Member LLCs – PART 1_92192.aspx

Author Resource :
The Lasher firm’s Seattle Lawyers can assist you in formation of LLCs and other business entities, collection of debts, and bankruptcy planning and representation. If you have any questions about this article, please contact Jeff Smoot at (206) 654-2411.

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