Florida Limited Liability Company
A Florida LLC, or limited liability company, is a business entity where none of the participants, referred to as members, are liable for the entity’s obligations and debt. Instead, each member’s liability is limited to their investment in the limited liability company.
Florida LLCs, in particular multi-member LLCs, are often used in asset protection planning. A judgment creditor’s exclusive remedy against a LLC interest of a multi-member LLC is a charging lien, or a lien against profit distributions. The creditor cannot levy on, or force the sale of, a judgment debtor’s interest in a multi-member LLC in Florida.
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 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.
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, and the judgment creditor has no ability to attack assets, financial accounts, or real estate owned in the name of the LLC. In a properly drafted operating agreement, a creditor is not able to inspect the LLC’s financial records and is unable to participate in management.
Instead, a judgment creditor’s rights are limited by Florida law to a charging lien, or charging order, against your limited partnership 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 by application to 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 which 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
A single member LLC in Florida 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. 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.
Forming a single member LLC in another state likely will not help a Florida debtor. Florida courts have ruled that LLC interests are intangible personal property located where the owner is. If a Florida resident owns an out-of-state LLC as a single member in a state that protects single member LLC, a Florida court could still allow a creditor to foreclose on the LLC interest—the court could apply Florida law rather than the law of where the LLC was formed.
Changing Florida Single Member LLC to 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. Better the initial member to sell an economic interest to a new member for reasonable value and then convey the LLC interest, or the initial member may accept new capital from a second member in exchange for an economic interest issued by the LLC.
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 in order 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 who may, or may not, be obligated to contribute money or other capital to the LLC. Therefore, in a properly drafted operating agreement, a second member may not have to pay or contribute money.
Sometimes a single member cannot practically solicit money from another person in consideration for their LLC membership interests. In that case, the single member should consider creating an irrevocable trust for the benefit of family members and gift a small LLC interest to fund the trust. Or, the member could consider an offshore LLC such as a Nevis LLC. These options are limited by fraudulent transfer risk if a debtor is facing current legal threat.
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, passive ownership of 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 a 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.
LLC Transfer on Death (TOD) Provision
In Florida, an LLC interest can transfer on death in two ways. First, the most common way of including an LLC transfer on death (or TOD) provision is through a revocable living trust. If the living trust owns the LLC interest then 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 beneficiary’s interest may be limited by the LLC operating agreement 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.
LLC owners may use transfer on death ownership to convey LLC interest after death, but the LLC operating agreement must be drafted to accommodate this type of transfer.
How to Form an LLC in Florida
The first step in creating a Florida LLC is filing an application 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 if the name is 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 identity 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.
Where to File
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.
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 to have jurisdiction over an LLC 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 of 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.
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.
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. There are differences in the two types of legal entities which affect the choice of entity for a particular business. For example, Florida charges higher 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. For asset protection, LLCs and partnerships provide similar protection.