What is Florida LLC Asset Protection?
In Florida, an LLC protects both the owner’s personal assets from liabilities of the company and the owner’s interest in the company from a judgment entered against the owner personally. The limited liability company provides a “shield” similar to the so-called corporate shield that traditional corporations provide their stockholders.
For example, an LLC customer, lender, or supplier might sue the LLC or a corporation because of a commercial dispute. The lawsuit against the LLC itself would not threaten the owners in their individual capacity because of the shield. Instead, each member’s risk is limited to the amount of their investment in the limited liability company.
As to creditor protection, normally a judgment creditor may execute its judgment against any and all of the debtor’s non-exempt assets. But a creditor may not execute its judgment against a debtor’s membership interest in a multi-member LLC.
What Is a Florida Limited Liability Company?
Florida LLCs are created pursuant to Florida Statutes. Florida’s limited liability company laws were rewritten in 2013, creating a new Chapter 605, the Florida Revised Limited Liability Company Act. In Florida, an LLC is controlled by a manager who directs the LLC’s business affairs. Members invest initial capital in the LLC, and they can incur gains or losses from their proportionate share of the LLC’s financial interests.
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.
Florida LLC Charging Order Protection
A Florida LLC membership interest is not an exempt asset under Florida law, but creditors have limited ability to collect a judgment from a debtor’s LLC interest. Florida law provides that a judgment creditor cannot seize or garnish these LLC ownership interests. The judgment creditor cannot attack assets, financial accounts, or real estate owned in the name of the LLC. In a properly drafted operating agreement, a creditor cannot inspect the LLC’s financial records and cannot participate in management.
Instead, a judgment creditor’s rights are limited by Florida law to a charging lien, or charging order, against your multi-member LLC interest. Florida Statute 605.0503 provides that the charging order is the creditor’s exclusive remedy against a judgment debtor’s membership interest in an LLC.
The creditor can obtain a charging lien in the court that issued the judgment against the debtor. The charging order gives the creditor a lien against any distributions of cash or other property, if any, which the partnership or LLC makes or owes the debtor. If the LLC or partnership does not distribute money, the judgment creditor receives nothing. All undistributed assets and accrued cash flow remain inside the LLC or partnership.
There is an IRS revenue ruling that held that in the event an LLC has taxable income allocated to a debtor/member, and the LLC makes no distributions that are attachable by a charging lien, the member’s creditor is responsible for the member’s income tax liability even though the creditor receives no distributions by virtue of its charging lien. However, more recent court decisions suggest that a creditor is not liable for taxes on income the creditor does not receive because of a charging lien.
Single Member LLC in Florida
In Florida, a single-member LLC is a limited liability company that has only one owner. It does not provide reliable asset protection.
The 2013 amendment of Florida’s LLC statute permits creditors to use foreclosure and other alternative collection remedies against a debtor’s interest in a single-member LLC in Florida. 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.
Once the creditor demonstrates the inadequacy of a charging lien the court may permit the creditor to foreclose the debtor’s membership interest. If the debtor’s interest is sold through foreclosure the creditor owns all the membership interest and replaces the debtor as the LLC’s sole member. Therefore, in most cases, 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.
Some states, including Wyoming, Delaware, South Dakota, Nevada, and others, do not distinguish between single-member and multi-member LLCs. In those states, a charging lien is the creditor’s exclusive remedy against all LLC interests.
Forming a single-member LLC in one of these states will likely not help a Florida debtor. Florida courts have ruled that LLC interests are intangible personal property located where the owner resides.
Example of LLCs in Collection
Harry reads online that single-member LLCs are protected in Delaware so he forms a single-member Delaware LLC. Harry then buys Florida real property in the LLC’s name.
A judgment is entered against Harry in Florida. The Florida court likely will allow the judgment creditor to foreclose Harry’s LLC interest. The court will apply Florida’s LLC law because the LLC interest is intangible property situated with Harry in Florida.
A Florida limited liability partnership (LLLP) may be a better asset protection alternative to a single-member LLC. For example, a person can form an LLLP where the person owns 100% of the limited partnership interest, and then the same person forms an LLC or corporation to act as the general partner. In such a case, the LLLP agreement may provide that all, or nearly all, income is distributed to the limited partners and none, of almost none, of the income goes to the general partner.
If there is a judgment against the limited partner, then the creditor’s sole remedy is a charging lien under Florida Statute 620.1703. Unlike the LLC laws, the partnership statute does not distinguish between single-member and multi-member entities in terms of creditor remedies. The creditor gets no additional remedies where one person owns the entire limited partnership interest.
How to Make a Florida Multi-Member LLC
The Florida LLC statute does not specify the minimum amount of LLC interests a second member must own to make an LLC a “multi-member LLC.” To date, Florida courts have not addressed this issue. Most attorneys advise that a second member have at least a 5 percent membership interest in LLC equity.
Adding a second member to an existing single-member LLC can constitute a fraudulent transfer if an LLC interest is assigned without fair consideration. It is often better for the initial member to sell an economic interest to a new member for reasonably equivalent value and then convey the LLC interest. Alternatively, the initial member may accept new capital from a second member in exchange for an economic interest issued by the LLC.
Sometimes, a single-member cannot practically solicit money from another person in consideration for purchasing an LLC membership interest in order to add a second LLC member. In that case, the single-member should consider creating an irrevocable trust for the benefit of family members and then gift a small LLC interest to fund the trust. The trustee of the trust can be a second LLC member.
The 2013 Florida LLC statute, section 605.0401, revised the definition of an LLC member in a way that makes it easier to add non-equity members to an LLC to create a multi-member LLC. The new law defines an LLC member as a person who may or may not hold any economic interest in an LLC and may or may not be obligated to contribute money or other capital to the LLC. Therefore, with a properly drafted operating agreement, a minority second member may not have to pay or contribute money in consideration for their membership interest. A new LLC may include a second member who has voting and management rights but no economic interest.
Forming an LLC in Another State
The formation of LLCs outside of Florida, such as in Nevada and Wyoming, is widely promoted on the internet. The promised benefit of forming an LLC in a state other than Florida (a “foreign state”) is that the foreign state’s laws are more protective of the debtor’s LLC interest in single-member and in multi-member LLCs.
The supposed advantage of foreign LLCs assumes that the laws of the foreign state of formation will apply to a creditor’s collection effort in Florida, or that a Florida court may not impose a charging lien on a Florida debtor’s LLC interest because the Florida court lacks jurisdiction over the foreign state’s legal entities.
But in Florida, 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 have held that they do not need jurisdiction over an LLC itself to impose a charging lien on the LLC membership interest held by a Florida debtor because the LLC is not a party to the charging order request.
Florida law governs a creditor’s efforts in executing the judgment against the Florida debtor LLC interest regardless of where the debtor filed the entity. Promises of asset protection advantages of foreign LLCs for Florida residents are typically hype designed to sell an ineffective product. Filing an LLC in a foreign state will not provide a significant asset protection advantage for Florida residents.
There are privacy advantages for creating an LLC in states other than Florida. Some states, including Nevada, Wyoming, and Delaware, do not require the filing of an LLC Articles of Organization to name the LLC’s manager or any members. Therefore, a creditor’s general search of public records will not reveal a person’s connection to an LLC in any capacity. A judgment creditor can require the judgment debtor to reveal any interest in an LLC during discovery in aid of execution regardless of whether the interest is otherwise disclosed publicly.
Transfer of Assets to a Florida LLC
Transferring assets to a Florida LLC is often referred to as funding the entity. LLC creators must decide which of their assets are appropriately held in the name of their LLC. It helps to understand the distinction between safe assets and liability assets.
Safe assets are unlikely to invite their own liability. For example, publicly-traded investment securities such as stocks, bonds, or mutual funds are safe assets because they do not expose the owner entity to legal liability.
On the other hand, liability assets generate risk because these assets involve direct dealings with third parties. Examples of liability assets are rental real estate, commercial businesses, boats, or motor vehicles.
If the LLC itself incurs liability through ownership and operation of a liability asset, the entity will be the target of a lawsuit. If an LLC is named as a defendant, all the assets owned by the entity could be subject to the claims of the judgment creditor. Liability assets should be titled and operated in one or more special-purpose entities that contain no safe assets and only one liability asset. Effective asset protection isolates valuable, safe assets from all potential liability assets.
Tip: Be careful when transferring assets to an LLC to avoid an existing creditor. Such a transfer might be characterized as a fraudulent conveyance.
LLC Transfer on Death (TOD)
In Florida, an LLC interest can transfer on death in two ways: through a revocable living trust or through the operating agreement.
The most common way of transferring an LLC transfer to the owner’s heirs is through a revocable living trust. If the living trust owns the LLC interest, the trustee may transfer beneficial ownership to the designated trust beneficiaries outside of any probate proceeding.
The second way is through a transfer on death designation pursuant to Florida Statutes, Chapter 711. If the LLC’s operating agreement expresses a member’s ownership with a transfer on death designation, the interest will transfer to the designated beneficiary upon the member’s death.
The LLC operating agreement may limit the beneficiary’s interest to a “transferable interest,” which is essentially a right to profit and distributions. The beneficiary may have to execute a copy of the operating agreement upon the original member’s death. The transfer on death clause in the operating agreement will take precedence over any contrary bequest in the decedent’s will or living trust.
Statement of Authority
Florida Statute 605.0302 permits an LLC to file with the Secretary of State a “Statement of Authority” that designates a member, manager, or any other person to act on behalf of the LLC. The Statement of Authority may give public notice that the authorized agent has the right to transfer LLC property or enter into transactions on behalf of the LLC. The Statement may also place conditions or limits on granted authority.
Statements of Authority are useful for some LLCs. A Statement of Authority can help prevent LLC employees and agents from conveying LLC property or incurring LLC liability without the knowledge, consent, and proper authorization of LLC owners and management. LLCs that organize in other states to maintain privacy need to state authority of certain individuals to act in Florida on behalf of the LLC when the Articles of Organization in the foreign state do not disclose management authority.
How to Form an LLC in Florida
The first step in creating a Florida LLC is applying with the Florida Secretary of State. An applicant files an Articles of Organization to form a limited liability company. The applicant must suggest a name for the LLC. If an applicant requests a name already in use or similar to another name on file, the application will not be accepted. Name availability is searchable on the Department of State website.
The application for a Florida LLC requires naming a registered agent. The registered agent is the person (or company) who is authorized to receive service of process if the LLC is sued. Any person residing in Florida can be designated as the registered agent.
The application to form an LLC includes the name of the LLC’s manager. The LLC members’ names are not required to be filed with the state. The identities of members are private except as required on a federal tax return. A new multi-member LLC requires a federal tax identification number.
After forming a Florida LLC, the parties should prepare a written agreement expressing the provisions which govern their business and legal relationship. This agreement is called an LLC operating agreement. These written agreements express the financial benefits, duties, and obligations of the parties. The agreements should also contain certain key provisions designed to accomplish your estate planning or asset protection goals.
To file the Florida LLC, the Articles of Organization must include the following information:
- Name of the entity
- Address of the entity
- Registered agent name
- Registered agent office address
- Purpose of LLC
- Manager or authorized representative
- Effective date
Florida Limited Partnership
A Florida limited partnership is an agreement between two classes of partners, general partners and limited partners, to conduct a business or invest in an asset. A general partner controls the partnership’s investments, distributions, and other business decisions. The limited partners have an equity interest in partnership assets, but they do not actively participate in the partnership’s business activity. A person may be both a general and a limited partner. Limited partnerships are separate legal entities created and administered under Florida Statutes, Chapter 620.
General partners and limited partners assume different amounts of personal financial risk. Limited partners are personally liable for partnership obligations and losses only to the extent of the amount of money they invested in the partnership. A general partner is personally liable for all partnership debt and obligations without limit. Florida law provides that a limited partnership may elect to be treated as a “limited liability limited partnership” (“LLLP”) under Florida Statute 620.9001; the LLLP general partner is not personally liable for all partnership obligations. Florida Statute 620.8504 provides that a creditor’s exclusive remedy against a judgment debtor’s limited partnership interest is a charging lien on the debtor’s transferable interest and distributions.
Florida Partnership vs. Florida LLC
Partnerships and LLCs have similar asset protection benefits. A creditor’s sole remedy against the debtor’s interest in either a multi-member LLC or a partnership is a charging lien. However, as discussed above, the limited partnership may be a preferred asset protection tool when there is a single owner.
There are differences in the two types of legal entities that affect the entity’s choice for a particular business. For example, Florida charges much higher filing fees and annual fees for limited partnerships than for LLCs. Many CPAs believe that LLCs are more flexible entities for income tax planning.
In practice, partnerships are more commonly used for real estate investments, whereas LLCs are the popular choice for operating businesses, especially where there are multiple owners.
FAQs About LLCs
Below are commonly asked questions about LLC asset protection.
Are LLCs good for asset protection?
An LLC is one of the best asset protection tools for holding income-producing assets, such as real estate or other investments, or operating businesses. In Florida, a multi-member LLC enjoys charging order protection from judgment creditors. Learn more about asset protection planning.
Does a single-member LLC have asset protection?
In Florida, a single-member LLC does not have the asset protection benefit of charging order limitation. In other words, a judgment creditor of the single-member owner could levy on the membership interests of the owner, forcing the sale of the company. A limited partnership may be the better choice for the single owner.
Does Florida have charging order protection?
Yes, Florida provides charging order protection for multi-member LLCs, meaning LLCs with more than one owner. However, single-member LLCs do not have charging order protection. A creditor can levy on the membership interests of the single-member owner.