What Is a Single-Purpose LLC?
A single-purpose LLC is a limited liability company that owns a single asset. Most often, single-purpose LLCs hold a particular real property or they own certain intellectual property such as website domains, trademarks, or patents. A single-purpose Florida LLC is subject to statutes and case law pertaining to limited liability companies generally.
Asset Protection Benefits of a Single-Purpose LLC
The primary asset protection of a single-purpose LLC is to isolate a debtor’s valuable assets from liability that could affect the owner’s primary operating business or investments. Civil judgments against the owner or his business would not be a lien on the separate single-purpose LLC or its assets.
Single-Purpose LLCs for Real Estate
Many Florida residents invest money in multiple parcels of real estate. Real estate ownership exposes the owner to potential legal liability. A tenant may sue the property owner under the tenant lease agreement, or the owner may be sued for breach of contract during and after the sale of a property. For that reason, most real estate investors title their real estate in LLCs. A tenant or purchaser lawsuit related to the property properly would be filed against the LLC owner rather than the individual investor.
One option is to form one LLC to hold multiple parcels of investment property. This option is cost-efficient because it requires only one LLC filing fee, one LLC operating agreement, and in most cases, only one federal LLC tax return. This is an “all eggs in one basket” ownership structure. The problem is that consolidated ownership puts at risk the equity in all properties from a claim involving any one of the properties. A creditor that obtains a monetary judgment against the LLC can recover the judgment from the equity of any of the LLC’s several properties.
Alternatively, many real estate investors own individual properties in different single-purpose LLCs. The investor holds each of his properties in a separate Florida limited liability company. Each single-purpose LLC’s assets comprise one property and typically an LLC bank account with a small cash balance as needed to collect rent and pay expenses. A claim against any one of the single-purpose real estate LLCs jeopardizes only the equity in that LLC’s one property
Single-Purpose LLCs for Intellectual Property
Single-purpose LLCs for intellectual property are typically used to segregate intellectual property from an operating commercial business. Many businesses rely on valuable intellectual property such as website domain names, website content, patents, trademarks, and general goodwill. A creditor collecting a judgment against the business may try to levy on the business’s intellectual property to interfere with business operations and gain leverage in settlement negotiations.
An effective asset protection plan includes forming a single-purpose LLC to own the businesses’ intellectual property Domain names, patents etc. may be assigned to the LLC. The business may continue using the intellectual property by licensing the property from the single-purpose LLC in consideration for reasonable license fees. The intellectual property would no longer be a business asset subject to attack by a creditor holding a judgment against the business.
What Laws Govern Single Member LLCs in Florida?
All Florida LLCs are subject to the Florida Limited Liability Company Act. The Act has default rules for the operation, ownership, and creation of limited liability companies in Florida. The Act assigns rights and liabilities to LLC managers and members. Importantly, the Act restricts a creditor’s remedies against the members owning interests in the single-purpose LLC.
LLCs have operating agreements among their members. The LLC’s operating agreement is a private contract among LLC members that expresses the members’ agreement regarding LLC ownership and management. The terms of an LLC operating agreement supersede any different provisions of the Act, with some exceptions.
Federal tax laws also affect the single-purpose LLC. Any one-owner LLC is treated as a disregarded entity so that all income and loss flows through to the owner’s schedule C on his 1040 federal return. Multi-member LLCs, including single-purpose LLCs, are taxed as partnerships or Sub-S corporations.
Legal Risks With Single-Purpose LLCs
Is The Single-Purpose LLC Your Alter-Ego?
The individual who owns investment real estate or who owns and operates a business is usually the same person who creates a single-purpose LLC to hold valuable assets.
A judgment creditor may argue that the single-purpose LLC is the same as, or the “alter-ego” of the real estate investor or the operating business. A successful alter-ego complaint may lead a court to rule that the single-purpose LLC is legally the same entity as the individual or underlying business, and the court may permit the creditor to go after the assets placed in the single-purpose LLC to satisfy its judgment against the owner or the operating business.
Piercing the Corporate Veil
Veil piercing means holding an LLC owner liable for the LLC’s liability. LLCs are designed to protect its owner from debts, claims, and lawsuits against the LLC entity. The owner’s protection is inherent in the description of “limited liability.’
When a creditor evaluates a claim against a single-purpose LLC and finds that the LLC probably has insufficient collectible assets the creditor may try to pierce the limited liability veil and proceed against the single-purpose LLC’s owners. Florida law makes piercing an LLC veil difficult; the creditor must prove that the LLC was created to defraud its creditors. An example is a single-purpose LLC with no business purpose and few assets.
Contractual Disputes Among LLC Members or Other Business Entities
Single-purpose LLCs may have multiple owners. Multi-member LLCs provide better asset protection than LLCs with just one owner. As in any business relationship among different people disputes sometimes arise. Disputes among members are more likely as the value of LLC assets increases. The best way to avoid member disputes is a well-drafted LLC operating agreement. Issues that could affect the allocation of LLC profits and losses should be addressed and resolved among members when the single-purpose LLC is formed. Disputes happen, but they are more easily resolved if the solution has previously been addressed in a proper operating agreement.
Similarly, contracts between a single-purpose LLC and any third party should be professionally drafted to anticipate and defend against claims that could arise from a business dispute. Third-party contracts should be signed by the LLC manager as the LLC’s authorized agent and not in the manager’s personal name.
Mistakes in LLC Formation and Operation
You can create a single-purpose Florida LLC by completing a short form on the Department of State’s website. Though short in length, the form has legal pitfalls that could undermine the benefits of a single-purpose LLC in an asset protection plan. Be careful to designate accurately the LLC as either member-managed or manager-managed. Do not put more information on the form than required. You are not required to list the names of LLC members, and doing so gives unneeded information to your creditors and the public. Some people forming their own LLCs confuse LLC positions with corporate designation; they list people as “president” or “secretary” instead of manager, members, or authorized agent.
A Florida LLC is easier to maintain than a corporation. Ongoing LLC maintenance does not require annual meetings with minutes and resolutions. LLCs do not have to issue share certificates or maintain a corporate ledger.
What’s Been Our Experience With Single-Purpose LLCs?
We have found that single-purpose LLCs are not suitable for start-up businesses, but they are very helpful as businesses grow and accumulate significant value. We almost always suggest that a business owner title their real property in a single-purpose LLC. A web-based business should title its domain and website content in a separate single-purpose LLC.
Keys To Effectively Using a Single-Purpose LLC For Asset Protection
- Assets must be properly conveyed to the single-purpose LLC. Real estate can be transferred with a quit claim deed. You can transfer website domain names by amending ownership through the host company. Other intellectual property must be properly assigned using a bill of sale, assignments, or government-provided transfer forms.
- Operating companies must execute a written lease or license agreement with the single-purpose LLC to continue use of the LLC’s assets.
- Operating companies must pay the single-purpose LLC commercially reasonable lease and license fees.
- The single-purpose LLC should have its own bank accounts in which to deposit lease or license receipts.
- Ownership of the single-purpose LLC should not be identical to ownership of the operating company.
Frequently Asked Questions
Are the owner’s membership interests in single-purpose LLCs protected from the owner’s creditors?
The asset protection of the single-purpose LLC membership interest is no different than any other Florida LLC that holds multiple assets or that operates a business. If there are more than one member, the creditor of any one member is limited to a charging lien on distributions, if any, to the debtor member.
What types of assets go into a single-purpose LLC?
Single-purpose LLCs should own assets of value that do not, themselves, invite claims and liability. For instance, real estate leased to and used by the principal owner, or his business, are not exposed to typical risks of tenant lawsuits. Intellectual property is valuable but the property, itself, does not interact with third parties who may assert claims.
Does my transfer of valuable assets to a single-purpose LLC have income tax consequences?
In most cases, the contribution of assets to a single-purpose LLC does not trigger recognition of taxable income. There are some exceptions when transferring appreciated real property. You should consult your CPA to make sure there are no adverse tax effects from your single-purpose LLCs.
Should I Use My Single-Purpose LLC to Hold Multiple Assets?
Most single-purpose LLCs own a single asset. This is most true when the asset is real property. It is not uncommon for one single-purpose LLC to own several different types of intellectual property. So, for example, one single-purpose LLC may own a website domain, trademark and goodwill that are all licensed to the same operating company.
How Much Does It Cost to Create a Single-Purpose LLC?
The basic cost of creating a single-purpose LLC and its operating agreement are the same as any other Florida LLC. It will be $500 or less without an operating agreement, or up to $2,000 with an operating agreement with asset protection provisions. There are additional costs and legal fees associated with the transfer of assets to the single-purpose LLC and the generation of lease and license agreements.
About the Author
I’m a nationally recognized attorney specializing in asset protection planning. I graduated with honors from the University of Florida Law School and have practiced law for almost 50 years.
I have been recognized as a legal expert by media outlets such as the New York Times and the Wall Street Journal. I have helped thousands of clients protect their assets from creditors.
