Can an LLC Have a Second Member Without the Right to Profit Distribution?
A creditor’s collection against a debtor’s membership interest in a limited liability company is limited to a charging lien against the debtor’s “transferable interest.” A transferable interest makes the member eligible to receive LLC distributions. The Florida Statutes state that the charging lien is the creditor exclusive remedy against a transferable interest in a multi-member LLC. A creditor has additional remedies, such as foreclosure, against the debtor’s transferable interest in a single member LLC.
Suppose a judgment debtor wants to start a new LLC business. They are concerned that an existing judgment holder may attack their new LLC interest unless the LLC has more than one member.
If this debtor has a business partner then the LLC would include both partners as members. The creditor could obtain only a charging lien against distributions if and when the new business is in a position to distribute profits.
However, in situations where the judgment debtor is the only person capitalizing and running the new LLC business, the challenge is making the LLC a multi-member LLC when there is no business partner sharing the risk and the work.
The Florida Statutes permit an LLC to include a member whose interest is not “transferable” and who is not entitled to receive distributions. Florida Statute 605.0401 states that a person may be a member without acquiring a transferable interest and without being obligated to contribute money to the LLC. There are no court decisions in Florida that explain that LLC membership has to include the right to distributions. There are also no court decisions stating that a second member without a transferable LLC interest and without a right to distributions does not make the LLC multi-member.
Adding a second member with a non-transferrable interest may work best when there is a business reason as to why the second member does not have a current right to distributions. For example, the LLC organizer may make the LLC multi-member by including a member who has the right to vote and participate in LLC decisions, but who is not eligible to get profit distributions because the second member has not yet contributed risk capital.
Or, the LLC organizer may have a multi-member LLC by giving a second member an option to acquire a transferable interest or who may qualify for a transferable interest through services provided over time to the LLC or its customers.
There are many ways for the LLC organizer to include a second LLC member without imposing financial obligations on the person or giving the person a stake, at least initially, in LLC profit. In doing so, a person forming a new business may be able to make the LLC a multi-member LLC without having to give up some of the profit distributions to a second member.
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.
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