Charging Lien Protection

A limited partnership and a multi-member limited liability company offer similar asset protection. Based upon a June 2010 Florida Supreme Court ruling in the Olmstead case, Florida law does not extend the same asset protection benefits to a single-member LLC. Anyone currently relying on the asset protection benefits of a single-member Florida limited liability company should reevaluate their asset protection plan.

The investment interests in a limited partnership and in a multi-member LLC are not “exempt” from levy by creditors of the limited partner. There is no constitutional or statutory provision in Florida which protects a limited partner’s or an LLC’s member’s investment. Asset protection is available by virtue of the limited procedural remedy given to creditors to levy upon a debtor’s limited partner interest and an against the membership interest in multi-member Florida LLC.

A creditor has no right to seize property titled in the name of a limited partnership or a multi-member LLC to satisfy the debt of a partner or member. Moreover, in a properly drafted LP agreement or multi-member LLC agreement, a creditor has no right to vote or inspect the books and records of the partnership or LLC. Florida Statutes permit the creditor to apply for a charging lien on the distributions of cash or other property made from the limited partnership or multi-member LLC to the debtor member or partner. In most closely held business arrangements where one partner or member has a creditor problem, a cooperative general partner/manager will retain profits inside the entity and make no distributions which might be taken by a lurking creditor with a charging lien. If the general partner/manager does not order distributions of cash or property, then the creditor gets nothing from the charging lien.

In addition, a creditor with an active charging lien may incur income tax liability. A 1997 Revenue Ruling suggests that where a creditor has a charging lien on a limited partnership or multi-member LLC interest and the general partner/manager does not distribute partnership income, the creditor, not the limited partner/member, is responsible for paying the tax on allocated income. The charging lien may become a “poison pill” as long as the creditor receives no money but incurs income tax liability in his effort to collect a judgment debt.

Jon Alper

About Jon Alper

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