Suppose a person is moving to Florida from New York and asks how he can protect his successful business as part of an asset protection plan. The business grosses over $3 million in annual revenue. The business is a single-member LLC. The person is not married. He has two adult children who are not involved in the business.
I would tell the person that his 100% membership interest in his LLC is not protected from a possible judgment creditor. Florida law limits a creditor remedy to a charging lien on distributions going to a judgment debtor from a multi-member LLC. The creditor may not foreclose the interest or seek other equitable relief such as receivership, etc. The law does not limit the creditor remedies against a debtor’s membership interest in single-member LLCs. There, the creditor may apply for a charging order, but the creditor may also seek foreclosure and seizure of the interest.
In many cases, such as this person’s situation, I suggest that the client convert his single-member LLC into a multi-member LLC by transferring a small percentage of the LLC interests to another person. That person could be a child, a trust for a child, a business partner, or a key employee. A mere assignment of LLC interests to another person without consideration may be reversed as a fraudulent transfer where the interests (as in this case) have significant value.
I would explain to this person that he must first have the business and LLC interests valued by an appraiser and then have to find a transferee second member who has sufficient money to buy the interest for a reasonable value based upon the appraisal. He might be able to defend a conveyance without consideration to his children as part of estate planning, but the creditor would likely challenge the transaction, and the result is not certain.
But what if the person does not want to transfer any interest in his business? Suppose he does not want his children, key employees, or business associates as partners who would share in the future growth of the business. And, even if there was a person he wanted as a partner, he does not know anyone who has the money to pay for part of his business. He also objects to the cost and complexity of having his business appraised to determine value.
I would suggest an alternative of converting his LLC to a limited partnership. He would own 100% of the limited partnership interests. He could retain all the equity in his business. The general partner could be a new LLC owned by the same client or jointly with a child or associate. The second owner of the general partner LLC would have a minority interest, and therefore, would not have control.
Florida statute 620.1703 states that a creditor remedy against a debtor’s interest in a partnership is limited to a charging lien against partnership distributions. The charging lien is the creditor’s exclusive remedy. Unlike Florida’s LLC laws, there is no exception for partnerships with a single limited partner. A partnership with only one equity partner has the same protection as multi-partner partnerships.
Conversion of the LLC to a limited partnership may have tax consequences in some cases. For instance, conversion of an LLC currently taxed as an S-corporation to a partnership could result in income recognition. Also, filing fees and costs of forming a limited partnership are higher compared to an LLC. People with existing LLCs should check with their CPA. For new business, a limited partnership with a single limited partner has asset protection advantages over a single-member LLC.
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