Are Single Member LLCs in Colorado Effective for Asset Protection?

The Boulder LLC Lawyers of LaszloLaw discuss single member LLCs under Colorado law.

The Colorado Limited Liability Company Act provides for the creation of single member LLCs. Individual business owners may look to create single member LLC to protect their assets and the LLC’s assets. In other words, the LLC formation is chosen to protect the sole member’s personal liability from creditors to the LLC and to protect the LLC’s assets from the sole member’s individual creditors.

While sole proprietors of a business startup may look to a single member LLC for asset protection–is it a good choice? Colorado law suggests that it may not be.

In In re Ashley Bright, 291 B.R. 538 (Bankr. D. Colo. 2003), the single member, Ms. Ashley Bright, filed for Chapter 7 bankruptcy. The LLC was not a debtor in bankruptcy–just Ms. Bright. However, the LLC owned real property in Colorado. The trustee in bankruptcy contended that because Ms. Bright “was the sole member and manager of the LLC at the time she filed bankruptcy, the trustee now controls the LLC and he may cause the LLC to sell the Real Property and distribute the net sales proceeds to his bankruptcy estate.” In opposition, Ms. Bright argued that, under Colorado law, the trustee was only entitled to a “charging order”–meaning the court can only “charge” the membership interest to satisfy the debt amount of the creditor but cannot assume management of the LLC or cause the sale of the real property. The court disagreed, finding that upon the the filing of bankruptcy by Ms. Bright, “she effectively transferred her membership interest to the estate.  Because there are no other members in the LLC, the entire membership interest passed to the bankruptcy estate, and the Trustee has become a ‘substituted member.’” As a result, since the bankrupcty trustee was the substituted sole member of the LLC, he could sell the real property for the debts.

Subsequently, amendments were made to the Colorado Limited Liability Act consistent with the above case. Under C.R.S. Section 7-80-702, a creditor who is assigned an interest in an LLC (and not approved as a member) is only allowed to receive in the profits of the LLC and is not a member and cannot participate in management decisions of the LLC. However, “[a] member ceases to be a member upon assignment or transfer of all the member’s membership interest“–this would mean that upon the assignment or transfer of the sole member’s interest to a creditor the sole member is no longer a member of the LLC. In effect, the LLC has no members. This is where C.R.S. Section 7-80-701 would come into play: “[a]t any time that a limited liability company has no members, upon the unanimous consent of all the persons holding by assignment or transfer any of the membership interest of the last remaining member of the limited liability company, one or more persons, including an assignee or transferee of the last remaining member, may be admitted as a member or members.” Thus, the creditor is now the sole member of the LLC and can appoint himself/herself as the manager as well (“Managers may be designated and removed by the consent of a majority of the members.” C.R.S. Section 7-80-402).

As the above details, a single member LLC in Colorado might not be an effective manner of asset protection in certain circumstances since a creditor can, in effect, take over the LLC and control those very same assets.

However, an LLC can be effective in many respects and it is necessary to explore what options are best for you and your Colorado company.

Boulder LLC Lawyers

The Boulder LLC lawyers of LaszloLaw have over 30 years of experience representing established businesses and startups on a variety of legal needs, including business formation, risk management, product liability and litigation matters. Contact our Boulder LLC lawyers today at 303-926-0410 or online to discuss your business needs.

Our Colorado business lawyers practice in the Greater Denver area including: Broomfield, Aurora, Denver, Louisville, Boulder, Golden, Lafayette, Erie, Frederick, Westminster, Thornton, Longmont, Loveland, Fort Collins.

UPDATED AUGUST, 2016