FLORIDA LIMITED LIABILITY COMPANIES IN REAL ESTATE TRANSACTIONS
Florida limited liability companies (“LLC”s) are the vehicle of choice as the entity for taking title to real property, generally speaking. LLCs are increasingly being used more and more for real estate and other transactions, as they offer a more flexible structure, “pass through” taxation, exemption from Florida’s corporate income tax, the same limited liability protection for owners of corporations, and additional asset protection for multi-member LLCs.
The Florida Limited liability Company Act (the “Revised Act”) which governs LLCs became effective January 1, 2015 as to all Florida LLCs (it became effective January 1, 2014, as to LLCs formed on or after that date) and is a comprehensive rewrite of the Prior Act known as the Florida Limited Liability Act.
The Revised Act provides the ability to reduce but not eliminate fiduciary duties, permits new members with no participation interest, permits members to dissociate from an LLC, expands dissolution provisions, clarifies service of process, and liberally permits the entity to be combined with other entities by way of merger or conversion.
LLCs are established by filing Articles of Organization with the Department of State. The articles of organization can include the name and address of one or more of the managers or manager-managed LLCs, or the name and address of one or more members for member-managed LLCs. The articles of organization can also include a statement as to whether the LLC is manager-managed or member-managed, which establishes the party or parties who are authorized to act on behalf of the LLC.
Often the Manager(s) and member(s) are the same person(s), and it is generally best (and it is common practice) to be manager-managed so the LLC will disclose in State records who is authorized to act on behalf of the LLC, as it is required to do so, but not to disclose its ownership. This is generally preferable because of the deemed notice rules and provisions related to the delegation of rights and powers.
The terms manager-managed and member-managed are not interchangeable. The Revised Act clearly provides that a member does not have any authority to act for a manager-managed LLC, and the Revised Act does not empower a manager with any powers to act for a member-managed LLC.
The Revised Act allows LLCs to file a statement of authority to limit the apparent authority of one or more members or managers or to provide authority for a member, manager or other party to act on behalf of the LLC.
When an LLC sells property, the authority of the person executing the conveyance documents must be established. Prior to insuring any conveyance of title for marketability of title purposes, title underwriters are requiring confirmation that persons executing instruments to be insured have the authority to bind the LLC. This can be accomplished under a statement of authority filed with the Florida Department of State and recorded in the Official Records of the County where the property lies, or confirmation with the Florida Department of State that a person identified as a manager is in a manager-managed LLC or a person identified as a member is in a member–managed LLC, as applicable, and that there is no recorded statement to the contrary.
An LLC is a creature of contract, and a written operating agreement should be prepared setting forth the existence of the entity and members, whether the LLC is manager-managed or member-managed, as well as important agreements and protocol concerning rights, duties and indemnification, and many other provisions. The Operating Agreement should be tailored to the particular transaction and set forth the important aspects of the members’ understanding regarding the terms of their deal. The time to do this is when the LLC is established and the members’ relationship is in harmony. Thought should be given to a mechanism that would be used if the members reach an impasse in making a decision.
Not long before enactment of the Revised Act, the Florida Supreme Court in the 2010 seminal “Olmstead Case” ruled that a judgement creditor of a single member LLC could execute on the debtor’s entire right, title and interest in the LLC to satisfy a judgement (as opposed to a charging order on the members’ transferable interest). The Florida legislature adopted the “Olmstead Patch” in 2011 to clarify that the holding in Olmstead does not apply to multi-member LLCs, and the exclusive remedy for a judgement creditor of a multi-member LLC is a charging order on the member’s transferable interest. This has not been changed in the Revised Act. As is the case in any business deal, when structuring a transaction for the purchase of real property or a business, you should consult with an attorney. Proper planning can avoid unwanted problems post-closing.