Professional Documents
Culture Documents
Single Member LLC
Single Member LLC
http://www.keytlaw.com/azllclaw/asset-protection/single-member-llc/ 1/5
Contact an AZ LLC attorney: 602-424-4152 | rickkeyt@keytlaw.com
Search ...
Arizona Limited Liability Company Law
Warning: Single Member LLCs Lack Asset Protection if the Member Files for Bankruptcy
by Richard Keyt, Arizona LLC attorney
One of the primary reasons to form an Arizona limited liability company is to shield the members from the debts and obligations of the
company. If formed and operated properly (i.e. the company complies with applicable laws), the Arizona LLC should protect the members
from the companys financial problems. This member protection applies to protect the members from a type of creditor I call the bottom
up creditor.
The Bottom Up Creditor
A bottom up creditor is a creditor that has a claim and/or gets a judgment against the LLC arising from the acts or omissions of the
company rather than from the acts or omissions of a member, manager or employee. The general rule that the members of the LLC are
not liable for the companys debts and obligations works well with claims by bottom up creditors. See my diagram that illustrates the
bottom up creditor problem.
The Arizona limited liability company gives good asset protection for its members, whether the LLC has one or many members. A single
member, LLC, however, does not give its member any asset protection from a top down creditor if the member files a bankruptcy
petition.
The Top Down Creditor
A top down creditor is potentially more serious for an LLC member because the creditor is not coming from the bottom up through the
LLC to get to assets of a member. Instead, the top down creditor first sues and gets a judgment against the member because of the
members acts or omissions, rather than the acts or omissions of the LLC, its managers or employees. For example, a member of an LLC
who runs a red light and kills or injures somebody is liable for the harm he or she caused. If the victim or the family of the victim sues
the member and gets a judgment against the member for the damages caused by the member running the red light, the LLC does not
provide any protection for the member against the creditor.
An LLC or other entity never protects you from harm that you cause. When you cause the harm, you have a top down creditor problem.
See page 2 of my diagram for a pictorial illustration of the top down creditor problem.
Adverse Single Member LLC Case Law
Olmstead vs. Federal Trade Commission
This Florida Supreme Court case involved the attempt by the Federal Trade Commission to enforce collection of a $10 million judgment
it got against Shawn Olmstead and Julie Connell for their involvement with entities that operated an advance-fee credit card scam. The
issue before the court was:
Whether, pursuant to Fla. Stat. 608.433(4), a court may order a judgment-debtor to surrender all, right, title, and interest in the debtors single-member
limited liability company to satisfy an outstanding judgment.
Olmstead argued that the issue should be answered in the negative because the only remedy available to a creditor who has a judgment
against a member of a Florida single-member LLC is a charging order. The court said:
we rephrase the certified question as follows: Whether Florida law permits a court to order a judgment debtor to surrender all right, title, and interest in
Beware of the Single Member LLC
Home About Other Services Contact Location
Mistakes Testimonials Packages Questionnaire Articles Services Blog Staff Sites