Business Asset Protection

Use of Business Entities To Operate Florida Businesses

A basic Florida  asset protection strategy for business owners is to operate a business in a separate legal entity instead of an individual sole proprietorship. The main business entities include corporations, limited liability companies, and limited partnerships. There are other legal  arrangements such as a general partnership of trusts but these structures are not often used to operate a small business. There are Florida statutes which establish the ground rules for corporations, LLCs, and limited partnerships. The Florida statutes give each type of business entity  unique legal characteristics, different formalities of operation, and different tax attributes.

Most owners of small businesses conduct their businesses in either a corporation, LLC, or a partnership. The owner’s selection of business entity among the corporation, LLC, or limited partnership depends upon many factors including whether the business is owned within a family, whether there are outside investors, expectation of public ownership, and tax planning. However, generally speaking, for purposes of protecting the owner’s personal assets it makes little difference which of these three entities the owner chooses to operate the business.

Asset Protection Advantages of Business Entities

The legal advantage of operating a small business through a business entity instead of an individual sole proprietorship is that the business entity can shield the  the individual owner against personal liability from business creditors and protect the owner’s personal assets. In a properly organized and capitalized business entity, the individual owners are not responsible for the entity’s debts and other risks. If the business breaches an obligation or causes injury to a third party, only the business and not the owners is legally responsible. In the case of a sole proprietorship, general partnership, or trust the owner, partner, or trustee, respectively, has unlimited liability for debts incurred in the business.

Conducting business in a corporation, LLC, or limited partnership can have some privacy advantages. Each of these three business entities are  separate “persons”  for legal purposes. They have a Federal Tax Identification number, which is separate from the owners’ social security numbers. Real estate, bank accounts, and other business interests can be legally owned in the entity name. The identity of corporate shareholders, LLC members, and limited partners are not required in any public filing with the Florida Secretary of State. In theory, at least, the business’s owners are private and evidence of ownership is not available for public access.

There are exceptions to this general principle in the case of large business. For example, publicly traded companies are required to disclose the names of principal shareholders in regular reports to the Securities and Exchange Commission and Florida regulatory agencies. Professional corporations (P.A.) or professional  limited liability companies (P.L. or P.C.) are other important exceptions. Professionals who conduct their business through a P.A. or a P.L. are not shielded from personal liability for professional negligence, and any claim not covered by malpractice insurance may be enforced against the professional’s personal assets. A professional corporation or LLC does protect each professional member from personal liability for damages assessed against any of the other shareholders or members.

Asset Protection Of Business Assets.

Asset protection of a business entity is much different than asset protection for individuals. Individual debtors residing in Florida may protect their most valuable assets under the exemptions made part of Florida’s constitution and its statutes. The individual Florida debtor is able to exempt from creditor judgments  his primary residence, many financial assets, and in most cases his salary and marital property from creditor attack. Florida’s  individual asset protection exemptions are not applicable to business entities; they apply only to natural persons. Florida law gives business entities no exemptions from creditor’s judgments.

A significant portion of people seeking asset protection advice are business owners- people who have acquired wealth through entrepreneurial business ventures. Often, the business owner’s potential creditors have claims against the business as well as the individual owner who may have signed personal guarantees of business debt or guarantees to vendors. The debtor’s business may be the primary source of his personal wealth. A creditor’s successful  attack upon  the business’s assets can deprive the owner of current income and future wealth because if the creditor can shut down the business it can cut off cash flow to the individual owners.

With no exemptions applicable to business entities all of a business’s assets are at risk if a creditor obtains a judgment against the business entity. The recording of a judgment will become an automatic lien on all real estate held in the business name. A creditor can garnish all business bank accounts and other debts owed the business including accounts receivable from individuals or third parties such as insurance companies. A judgment creditor can even levy upon the business’s leases thereby depriving the business access to leased offices, facilities, and leased vehicles. Essential intangible property including intellectual property such as patents, software, or computer codes these assets are exposed to judgment creditors’ execution and levy.

Effective asset protection of business assets is more difficult and the tools more complex than protection of its owner’s assets. There are tools available to shelter a business’s most valuable assets, but these tools and planning must be implemented early and thoughtfully. Also, business asset protection often has income tax consequences, and asset protection tools may have different tax effects upon different owners of the same business. Business planning should involve an asset protection attorney, the business’s general attorney, and the business’s tax accountant.

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Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.