Single-Member LLCs in Connecticut: Are They Safe?
By: Hillel Goldman, Partner
September 11, 2013
While businesspeople acquired a new business vehicle when single-member LLCs first gained IRS acceptance on January 1, 1997, business lawyers were confronted with the issue of whether this new form of LLC would give business owners with the same limited liability protections that corporations and multi-member LLCs already provided their owners.
In Connecticut, at the state level, business lawyers debated whether single-member LLCs needed operating agreements to keep these protections. Some lawyers argued that operating agreements in single-member LLCs were a waste since the only owner of the LLC is the single-member. The prevailing argument however, was that this was precisely why an operating agreement was needed in single-member LLCs. Since there is only one owner in a single-member LLC, there is a greater need to distinguish the LLC owner from his or her business to protect the owner from personal liability so therefore the need for an operating agreement was even greater.
If this was not enough for Connecticut business lawyers to discuss with their clients, inevitably, clients ask: “Should my LLC be a Delaware LLC?” or “Isn’t Delaware (Nevada, Maryland or Virginia) the best place for me to form my LLC?” Since I began practicing law, I’ve had to explain to numerous clients why if they planned to be based in Connecticut, there are very few legitimate legal reasons or circumstances to form a Delaware LLC for their businesses.
Unfortunately, a 2010 Florida Supreme Court decision has forced me to re-examine my position on whether Connecticut is the appropriate state to form single-member LLCs for my clients. Although it has always been assumed that judgment creditors of the members of LLCs could only seek the member’s distributions from the LLCs, the Florida Supreme Court ruled that creditors can now invade single-member LLCs and force the sale of the LLC’s assets to collect their debts from the member. This is especially troubling where a businessperson owns more than one single-member LLC (as was the case in the Florida decision) and the creditor from one single- member LLC can seek to satisfy its outstanding judgment by forcing the foreclosure of a deeper pocketed single-member LLC owned by the debtor.
Connecticut’s LLC law is very similar to the Florida LLC law that the Florida Supreme Court looked to in making this disturbing finding. The Delaware LLC Act, on the other hand, states that a creditor’s exclusive remedy in collecting a judgment against the owner of a single-member LLC is to look only to that LLC’s distributions. In its 2013 legislative session, Delaware recognized the importance of this issue in light of the 2010 Florida decision and strengthened this protection by making it even clearer that judgment creditors of owners of single-member LLCs are definitely prevented from invading single-member LLCs to collect their judgments. In order for Connecticut LLCs to be the appropriate vehicle for the single-member LLC businesses, Connecticut quickly needs to look to the Delaware approach as its model.
Until Connecticut addresses this serious issue, people forming single-member LLCs in Connecticut are very justified in asking their lawyers whether it is advisable to form a Connecticut single-member LLC. I believe that it is extremely valid at this time for them to ask: “Should my LLC be a Delaware LLC?” or “Isn’t Delaware the best place for me to form my LLC?” It is important for their lawyer to provide them with an educated answer.