How To Free Trapped Profits From A Professional LLC

I often get asked how a licensed professional with a money judgment entered against him can get money out of his professional business. If the professional is head of household he can exempt and protect salary paid him from his own business (subject to some conditions). If the professional’s business is a professional limited liability company then his creditor cannot levy upon profits, after salary, which are retained in the business, but the creditor could get a charging lien on any profit distributions made from the professional business to the owner. For tax purposes, many professionals would prefer to pay themselves in profit distributions rather than salary, yet with a charging lien profits would be trapped inside the LLC

If the LLC were owned not by the professional debtor but by his spouse or by he and his spouse as tenants by entireties then the ownership interest would be exempt from this individual creditors and there could be no charging lien. However, in Florida, many professions (including attorneys) must own their businesses in their own name. They cannot hold membership interest in the name of their spouses.

An attorney I know contacted me with his thoughts concerning “trapped profits” in a judgment debtor’s professional limited liability company. He suggested that a professional llc owned individually by the professional could free profits trapped by a charging lien by overpaying income tax withholding and quarterly estimated to the IRS. Assuming the professional judgment debtor is married and files a joint tax return, the IRS would the following year issue a large tax refund to the debtor and his wife jointly as they had filed a joint return. The refund check payable to the debtor and his wife would appear to be exempt from the individual’s creditors as tenancy by entireties property. The money could be deposited into the couples protected joint bank account.

Technically, this device is a fraudulent transfer from the debtor’s business to he and his wife. The tax refund although payable to husband and wife actually represents a refund of the debtor’s payments to the IRS from the earnings of his solely owned business. Yet, in practice, only an unusually skilled and persistent creditor attorney would figure out the nature of the tax refund.

Page last updated on May 22, 2020

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