Using Voting and Non-Voting Membership Interests To Create A Multi-Member LLC
The Florida Supreme Court decision this summer which removed charging lien protection for single member LLCs has caused business owners and their attorneys to search for ways to make sure their LLCs have more than one member. When only one person has invested money in a business it is difficult to turn that same LLC into a multi-member entity. One possibility is for the current owner to sell a portion of his LLC to a third party for reasonable value. The sale would have to withstand creditor challenge of the sale price and whether the sale is really “arms length.” A second possible plan is for the LLC membership interest to be divided into voting interests and non-voting interest, and for the owner to invite a third party to join the LLC as a voting member. The debtor would retain all the financial interest, but important LLC actions would require the consent of the new voting member.
The use of voting and non-voting membership interests raises some interesting issues which may someday be answered in court cases. For instance, does a second member with voting rights, but without a financial interest, make the LLC a multi-member LLC for charging lien purposes? The charging lien remedy is supposed to protect non-debtor member’s LLC interest, but a member with voting rights only has no financial interest to protect from the debtor member’s creditors. Another issue is whether the voting member should give consideration for acquisition of his voting interest in what had been a single member LLC? Is this plan simply another fraudulent transfer to avoid creditors? These are not the only issues.
Even with potential legal challenges, I think that a business owner can increase LLC protection by giving away some voting rights to a trusted associate or employee without relinquishing or selling financial stake in a single owner business.
About the Author
Jon Alper is an expert in asset protection planning for individuals and small businesses.
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