A couple of weeks ago, based on the 2010 case of Olmstead v. Federal Trade Commission, Florida Legislature concluded that multi-member LLCs are protected against creditors seeking to seize ownership interest in the LLC.  They clearly expressed their point by rewriting Florida Statute, §608.433, to match their intent.  As a result, Florida is one of only seven states to determine that the specific charging order of creditors is the only means of recovery against an LLC.

This recent Florida ruling just adds to the list of advantages of choosing an LLC over a corporation in the state of Florida.  In order to be better protected, a small business owner should be familiar with these advantages.

First, assets are much better protected through a multi-member limited liability company than through a corporation. Under a corporation, if an individual owner of a company, even with multiple owners, is sued, the creditor can seize shares of the corporation that form the entire ownership of the company.  Conversely, through a limited liability company, the creditor cannot seize those shares of ownership.

Second, there is tax advantage to using multi-member LLCs compared to corporations.  The owners of an LLC get to choose how their company will be taxed dependent on what form they decide to fill out.  The company can be taxed as an “S” or “C” corporation and, if there are multiple owners in the LLC, it will be taxed as a partnership by default.

Third, a multi-member LLC has an operating agreement that provides additional asset protection for business owners.  Under the operating agreement, which is regulations for the LLC, the owner can include a stipulation that can scare off creditors from even considering a charging order by essentially assuring penalty against them if they do so.

Fourth, multi-member LLCs are also beneficial when estate planning.  For example, if one was to give the gift of their partial interest of a company to a successor, an LLC allows the giver to remain in control of the company even though he or she no longer owns their share.  Furthermore, an owner of an LLC can transfer the interest of the business to the successor while still maintaining control of the operations for years to come while at the same time taking advantage of a $5 million dollar exemption on gift tax, if done before 2013.

Fifth, the transfer from an already existing corporation to a multi-member LLC is an easy and tax free transition. The process of the conversion is statutory based on Florida Law, which makes the process very efficient. Once the corporation is made into an LLC, the company is viewed as if it has always been an LLC since the time the corporation was formed.  Furthermore, after the conversion, if the company has the same owners with the same share proportions as prior to the conversion and those owners choose to have the LLC taxed in the same form that the corporation was taxed, there will be no additional taxation and no changes to how the LLC will be taxed.

In conclusion, unless a business is publicly owned or plans to go public, all business owners should be operating an LLC.  If you own a small business as a corporation and have no plans to go public, we urge you to convert to an LLC for all the reasons mentioned.  Contact a qualified estate and asset protection attorney as soon as possible to assist you.

For more information on successful Florida estate planning and probate, please contact the South Florida law firm of Wild Felice & Pardo, P.A. at 954-944-2855 or via email at info@wfplaw.com to schedule your free consultation.

It’s a Wild world. Are you protected?

A difference between a corporation and an LLC is that a creditor of an owner may directly levy on the debtor/shareholder’s stock in a corporation and thus take all the rights that compose the stock share, such as voting rights, right to elect directors, etc. By contrast, a creditor of an LLC is usually limited to a lien against the debtor/member’s economic right to distributions only until the judgment is paid, but the creditor usually takes no other of the debtor/member’s rights in the LLC. (This is often referred to as a “charging order lien” from the form of the relief usually specified in the RULPA/RULLCA).

Keep in mind that one can have an “S-LLC” by the simple expedient of checking the box for the LLC to be taxed as a corporation instead of a partnership, and then making the S-election for the LLC.

Although the ruling in the Olmstead case subjected single-member LLC assets to liability tied to its single member, this may be held to be a bad ruling in the future. It certainly goes against the purpose and spirit of the LLC laws. In any event, this potential adverse result may be easily avoided by interjecting a second member in any Florida LLC until the law is further clarified. Another significant problem with an S Corp is that they are, by far, the worst structure for advanced planning purposes. The limitations imposed on financial planning and estate planning and the limitations against international shareholders are major impediments to using S corps, particularly in an increasingly more complicated estate and tax environment and a world that is quickly globalizing.

Too many attorneys and CPAs don’t seem to know that you can make the S election for the LLC; in general I much prefer the LLC for estate planning and asset protection purposes (although the single-member issues can be a concern if their are not two viable members to include in the LLC). While S corporations still have some effective uses, their use in the future as business entities will be far more limited, and LLCs will continue to be the vehicle of choice for privately-held and family businesses.

In addition to severely weakening the asset protection advantage of a single member LLC in Florida, the Florida Supreme Court’s decision in the Olmstead case unfortunately calls into question the effectiveness of multi-member LLCs in this state.

The Olmstead decision provides a stark reminder of two very important points:

1.Asset protection law varies significantly from state to state; and
2.Asset protection laws are constantly changing, both through statutory changes and court decisions.

Having a competent professional assist you with your asset protection planning is vitally important. It is also important to have any asset protection plan reviewed periodically because the law in this area is evolving very rapidly.

There may be no area of law as controversial as asset protection. However, the crash of the US economy has garnered an increase in interest by many clients in utilizing this area of law for their benefit. Asset protection is complex and often scary but it is a legitimate area of law that incorporates many other areas of law, including bankruptcy, tax, corporate law, contracts, creditor-debtor rights, insurance law and estate planning. Any attorney practicing in the area of asset protection must understand how these areas of law work together and have a comprehensive understanding of Florida’s Fraudulent Transfer Act.

I am certain that most attorneys could share compelling stories about their clients who might have benefited from such preparation. Many of these stories are not of wealthy clients trying to evade paying taxes or legitimate creditors; they are stories of hard-working families who, because of an accident or unforeseen circumstances, lost everything.

Although Florida attorneys cannot offer Florida Asset Protection Trusts to their clients, there are numerous other asset protection techniques which can be utilized to help limit liability exposure for clients. Some techniques include: the use of LLCs or limited partnerships, titling assets as tenancy by the entirety, enhancing retirement benefits, engaging in life insurance planning, the use of certain out of state business entities, purchasing educational plans, and the use of prenuptial or post nuptial agreements.

Whether you offer your clients asset protection planning or not, attorneys all have a duty as advisers to educate ourselves in this growing area of law. Some advocates of asset protection planning suggest that attorneys who practice in certain areas and do not advise their clients in asset protection techniques may be exposing themselves to malpractice claims in the future.

1. Waiting too long to start planning. The longer your asset protection plan has been in place, the stronger it will be. It will also cost less to do the planning long before you have a problem. Once a lawsuit has been filed against you, any transfers you make can be overturned. In order to battle a lawsuit effectively, make sure you have an asset protection plan in place long before you need it.
2. Mistakenly committing fraudulent transfers. If you transfer assets to a friend or family member in order to avoid losing them during a settlement, you may find it does you no good. This is not illegal, but the courts can reverse the transfer and hold the transferee partially responsible.
3. Trying to hide your assets. This is no longer possible. Even moving assets offshore does not prevent them from being discovered. Eventually, lawyers will uncover the existence of the asset. In some cases, having the asset offshore may protect it, but it will not prevent it from being discovered.
4. Assuming you can outsmart the creditors. Those trying to collect their debt and the lawyers working for them have done this before. You will not figure out a way around the system.
5. Handing control of your assets over to someone else. Often called the “poor man’s” asset protection, signing over your wealth to another person is never a good idea, even if he is a trusted friend or family member. You may have to give up some control at some point, but deciding you will protect your assets by giving them over to a sibling or adult child is a mistake. Discuss your options with an experienced asset protection attorney before proceeding.
6. Assuming asset protection and estate planning are the same thing. Asset protection is part of any strong estate plan but they are not the same thing. It is important to remember a living trust does nothing to protect you from creditors.
7. Confusing bankruptcy law and asset protection law. In a state like Florida, newer bankruptcy laws do not affect the unlimited homestead exemptions. You have less protection in bankruptcy court, so filing for bankruptcy should be used as a last resort.
8. Assuming it is too late to establish an asset protection plan. It is never to late to do this. Doing something is better than just allowing the courts to have their way with you. At least make an effort to protect your assets. You never know when you may be faced with a situation where your assets are at risk.
9. Not getting your foundation estate plan in place as part of your asset protection plan.
10. Trying to do it yourself. You only have one shot at protecting your assets correctly. Be sure to use an attorney that specializes in asset protection.

Asset protection is a necessity in this day and age of “money for nothing” mentality. Fifty million law suits are filed each year. Each of us will be sued 5 times during our lives. Will you brush your lawsuit off without worry or will one of those law suits permanently cripple you and your family financially? The time to plan is now.