Should Your LLC Issue Written Certificates of Membership Interests?

Ownership of a corporation is evidenced by a stock certificate. Ownership of an LLC is evidenced by the LLC’s operating agreement , and in most cases, confirmed by LLC income tax returns. LLCs do not typically issue “shares” or other written certificates of ownership. But, an LLC may elect to issues written shares, and in some cases, establishing member ownership by written certificate has asset protection advantages.

Many of my clients suggested forming a single member LLC in states that apply charging lien remedies to single member LLCs; states like Nevada, Wyoming, or Delaware. I have believed that forming an LLC in a state other than Florida, such as Nevada or Wyoming, has not asset protection advantages because Florida courts will apply Florida’s collection laws if the debtor and his LLC interest is in this state.

I now think it may be possible to use foreign state LLCs for asset protection, but the reason is not that they have better LLC states that are, for instance, protective of single-member LLCs. The possible advantage relates to the holding in Sargeant case which I have discussed in prior posts.

Suppose a Florida debtor formed an LLC in a foreign state. The debtor’s operating agreement stated that the LLC will issue written share certificates to evidence ownership. The debtor sends his share certificates to Delaware to be held by the registered agent or the LLC’s Delaware attorney. If the creditor seeks a charging lien in a Florida court the debtor can argue that the Florida court has no jurisdiction over the share certificates located outside of Florida or the foreign LLC located outside Florida based upon the Sargeant ruling. This theory will not work if the LLC owns Florida property or is registered to conduct business in Florida, but for an LLC owning only intangible property the plan provides new debtor defenses against charging liens for single and multiple member LLCs.

Last updated on May 22, 2020