A client asked whether tax elections by an LLC effect the LLC’s asset protection benefits. An LLC is often employed as an asset protection tool because Florida statutes restrict creditors’ ability to collect money from a debtor’s LLC to a lien on distributions made by the LLC to the member/debtor. If the LLC manager makes no distributions to the debtor then the creditor is not entitled to any money from the LLC. For tax purposes, an LLC may elect to be taxed as a partnership, a corporation, or in the case of a single member LLC, a disregarded tax entity.
A corporation has no asset protection benefits. A creditor can levy upon the debtor’s stock in a corporation. The client asked if he forfeits the asset protection protections of an LLC if he tells the IRS to tax his business as a corporation rather than as a partnership or disregarded entity.
The answer is “no.” Tax elections do not change the legal status of a business entity under Florida statutes. An LLC choosing to be taxed by the IRS as a corporation is still an LLC entity under Florida law and retains the LLC’s asset protection features.