There are two asset protection tools which have substantial benefits for estate planning as well as asset protection. These tools are the Florida limited partnership (LP) and the Florida limited liability company (LLC).
Limited partnerships are created and administered under Florida Statutes, Chapter 620. A limited partnership is a partnership consisting of two classes of partners: general partners and limited partners. A general partner has general liability for all partnership debts and has the responsibility and authority to manage the partnership’s business. The general partner controls the partnership’s investments, distributions, and other business decisions. A limited partner has an investment interest in the partnership and plays a passive role in the partnership’s business. An individual can be both a general partner and a limited partner in a limited partnership.
A limited liability company is a business entity created pursuant to Florida Statutes, Chapters 605 and 608. Florida’s limited liability company laws were rewritten in 2013 creating a new Chapter 605, the Florida Revised Limited Liability Company Act. The new statute does not change the asset protection features and requirements of Florida LLCs. The Act does make it easier to design LLC membership and operating agreements to provide asset protection benefits.
An LLC is controlled by a manager who directs the LLC’s business affairs and determines the amount and timing of cash distributions. The investment interest in an LLC is held by the members. Members invest initial capital in the limited liability company, and they can incur gains or losses from the LLC’s business. An individual can be both a manager and a member of an LLC. The manager of the LLC can be a member or non-member. LP interests and LLC membership interests are both intangible property, and both types of interest are assignable and transferable subject to restrictions of the limited partnership agreement or the LLC operating agreement.
Funding Limited Partnerships and LLCs
A limited partnership or limited liability company works for asset protection and/or tax planning only if you transfer assets from your name into the name of the entity. Transfer of assets into a partnership, LLC, or other entity is often referred to as “funding” the entity. LP and LLC creators must decide which of their assets are appropriately held in the name of the LP/LLC. In making this decision about funding, it is important that you understand the distinction between “safe assets” and “liability assets.” Limited partnerships and limited liability companies should hold only safe assets.
Safe assets are those which are unlikely to invite their own liability. For example, passive ownership of publicly traded investment securities such as stocks, bonds, or mutual funds is unlikely to result in your being sued. Mere ownership of passive investment assets, without some active involvement in the underlying business, will not expose the owner entity to legal liability and civil judgments.
Liability assets, by their nature, create a substantial risk of liability. These assets general involve active participation and/or direct dealings with third parties. Examples of liability assets are rental real estate, commercial businesses, boats, or motor vehicles, any of which has inherent risks of legal disputes.
Asset protection planning uses LPs and LLCs to protect valuable assets. If the LP/LLC itself incurs liability through ownership and operation of a liability asset, the entity will be the target of a lawsuit. If an LP or LLC is named as a defendant in a lawsuit, all of the assets you sought to protect in the entity could be subject to the claims of the judgment creditor. Liability assets should either remain outside of the asset protection entity, or alternatively, these assets should be titled and operated in one or more special purpose entities. Asset protection isolates valuable safe assets from any and all potential liability assets.
How to Form a Limited Partnership or LLC
The first step in creating a Florida limited partnership or limited liability company is the preparation and filing of an application with the Secretary of State. An applicant files a Certificate of Limited Partnership to form a limited partnership or Articles of Organization to form a limited liability company. The applicant has to provide a name for the partnership or LLC. You can search name availability on the Secretary of State’s website. If you submit a filing with a name already in use or if the name is similar to another name on file, your documents will not be accepted. The application for LP/LLC requires naming a registered agent. The registered agent is the person (or company) who is authorized to receive service of process if the LP/LLC is sued. Any person residing in the state of registration can be designated as the registered agent so long as that person/entity has a Florida street address. If you form an LP or LLC in a state other than Florida, you will have to find a company or individual that will, for a fee, serve as registered agent in the state of formation.
In Florida, the Certificate of Limited Partnership includes names and addresses of all general partners of the partnership. The names of the limited partners are not required to be filed with the State. LLC Articles of Organization include the name of the LLC’s manager. The members’ names are not required to be filed with the State. Since these documents are a matter of public record, the names of the general partners of an LP and the manager of an LLC will be publicly available, but the limited partners (LP) and members (LLC) will be private except as disclosed on a federal tax return.
A partnership is legally formed when the Secretary of State’s office receives the properly filed Certificate of Limited Partnership and filing fee. Likewise, an LLC is legally formed with the Secretary of State receives properly completed Articles of Organization and the filing fee. You may need a certified copy of the filed documents to open a bank or brokerage account or for the purchase or sale of real estate in the name of the LLC or LP. You should consult your CPA about obtaining a tax identification number for your new entity.
Where to File
Formation of limited liability companies (LLC) and limited partnerships (LP) outside of Florida, such as in Nevada and Wyoming, is widely promoted on the internet. The promised benefit of forming a partnership in a state other than Florida (a “foreign state”) is that foreign state partnership laws are more protective of a debtor’s interest in a limited partnership or LLC. Promoters of foreign state LPs and LLCs argue that their state’s law will best protect the Florida debtor’s interest.
The supposed advantage of foreign LPs and LLCs assumes that the laws of the foreign state will apply to a creditor’s collection effort in Florida or that a Florida court may not impose a charging lien on your partnership or LLC interest without jurisdiction over the foreign state LLC. The general rule is that the law applicable to a creditor’s execution of a civil judgment is the law of the state where the debtor resides. Florida courts do not need to have jurisdiction over an LLC or LP to impose a charging lien on the partnership or membership interest held by a Florida resident because the LP/LLC is not a party to the charging order request. If you live in Florida, Florida law governs your creditor’s efforts in executing the judgment against your LP/LLC interest regardless of where you filed your entity.
Contrast this rule to what is known as the “internal affairs doctrine” which holds that internal disputes among partners are governed by the law of the state of filing or incorporation. The internal affairs doctrine means that if you create an LP/LLC in Nevada, Wyoming, or other foreign state, disagreements with your fellow partners/members will be governed by the laws of the state of formation. The internal affairs doctrine has nothing to do with defending judgment collection against your investment interest in an LP/LLC. Assertions of asset protection advantages of foreign state LPs/LLCs for Florida residents are “hype” designed to sell you something you do not need. As stated elsewhere, filing a partnership or LLC in a foreign state may reduce your filing fees, but it will not provide a significant asset protection advantage.
After the limited partnership or limited liability company is filed and legally created, the partners/members should next prepare a written agreement expressing the provisions which govern their business and legal relationship. That agreement is called a “Limited Partnership Agreement” (for an LP) or “Operating Agreement” (for an LLC). The agreements contain similar provisions and serve the same purpose in both types of legal entities. In both, the agreement expresses the financial and legal agreements among the participants such as the general partner or manager’s duties, matters on which the vote of the partners/members is required, each person’s initial capital contribution and obligation to contribute additional capital over time, each person’s share of the LP/LLC capital and profits, and all other matters affecting the relationships between the parties.
The partnership or operating agreement should also contain certain key provisions designed to accomplish your estate planning or asset protection goals. For example, the agreement should include legal restrictions on the transfer of investment interests to third parties, including your creditors. The agreement should deny any individual’s creditors the right to participate in internal LP/LLC affairs. LP/LLC agreements are flexible and may provide different investors with varying amounts and priority of distributions, preferences and values on liquidation, voting rights, duties to contribute services and money to the entity, and other contract provisions governing the operation and management of a financial arrangement among the parties.
Single Member LLC
In 2011, the Florida legislature amended Florida’s LLC statute to state that a charging lien is the exclusive creditor remedy against a debtor’s membership interest in a multi-member limited liability company. The 2011 LLC law permits creditors to use foreclosure and other alternative collection remedies against a debtor’s interest in a single-member LLC. There is one condition – the creditor must demonstrate that its judgment will not be satisfied in a “reasonable time” from a charging lien on the single-member LLC membership interest. New LLCs designed for asset protection should include at least two members, and existing LLCs should add at least one member to restrict a creditor to a charging lien.
A common question is whether a second LLC member has to have a minimum percentage interest. The Florida LLC statute does not specify a minimum LLC interest, and Florida courts have not addressed this issue. Most attorneys will advise that a second member have at least a 5 percent membership interest in LLC equity, and many attorneys advise a greater minority interest for asset protection planning.
People with existing single-member LLCs may want to convert their LLC to a multi-member LLC. Adding a second member to an existing single-member LLC often raises fraudulent transfer issues. Simply assigning a small economic interest to a second member without fair consideration is reversible as a fraudulent transfer. The initial member may either sell a small economic interest to a new member for reasonable value and convey the interest by assignment, or the initial member may accept new capital from the second member in exchange for an economic interest issued by the LLC.
In 2013, the Florida legislature passed the Florida Revised Limited Liability Company Act (which was effective in January 2014). The Act revised the definition of an LLC member in Section 605.0401 in a way that makes it easier to add one or more members to an LLC. The 2013 law defines an LLC member as a person who may, or may not, hold any economic interest in an LLC and who may, or may not, be obligated to contribute money or other capital to the LLC.