Limited Liability Entities
Subchapter S Corporations
C Corporations

 

 

 

 

Business planning   has become an important part of asset protection fueled by the perception that jury awards and judicial decisions are arbitrary and irrational in both assessment of liability and magnitude of damage awards. Lawsuits are especially are a problem for small, closely held businesses which do not have sufficient resources to defend expensive commercial litigation or pay large judgments. Many people contemplating a new a business want to know what type of business entity provides the best protection from creditors. Likewise, established financially successful businesses are concerned about protecting business assets from frivolous lawsuits.

In the first place, a business may be sued directly in the conduct of its business operations for its own debts and actions. Examples include a foreclosure action brought by one of a business's secured lenders, a lawsuit against the business for breach of contract, or a suit based on an intentional act by one of the business employees. A judgment against a business would jeopardize all assets owned by the business including all of its business real estate, equipment, inventory, accounts receivable, and leasehold improvements.

A business owner can help protect business assets by encumbering these assets with perfected secured debt, such as a mortgage or a business line of credit. When a bank gives a business entity a standby line of credit, the bank will require a security interest on all business assets, including real estate, inventory, equipment and cash, to secure the business's repayment of any loan. The bank will file a mortgage or UCC-1 to perfect the priority of its security interest in the pledged assets against subsequent judgment creditors. Any subsequent judgment creditor would have to repay the bank the full outstanding balance of the bank's secured loan before the creditor could begin to attack business assets. Withdrawing borrowed funds could subject the owner to tax liability.

Alternatively, a business owner may be sued personally for the owner's personal actions and debts outside any particular business. For example, if a businessman were unable to pay a secured debt which he had personally guaranteed, the judgment creditor could obtain a personal judgment against the businessman based on the guarantee. Similarly, if a businessman entered into a new venture with a partner, and as a result of a dispute the partner sued successfully, the partner's judgment would jeopardize all of the personal assets of the businessman and his family.

The personal judgment would also expose any stock the businessman owned in a corporations including stock in his own, closely held business Corporations, although historically a popular form of small business, are a relatively poor asset protection entity. Although corporations shield business owners personally from liability incurred by their corporation, the owner's stock in his corporation is vulnerable to his personal judgment creditors. A personal creditor could attach the businessman's stock in any and all of the owner's corporate businesses to satisfy a money judgment. Once a creditor obtained the businessman's shares in his own corporate business, the owner/debtor would lose all equity in that corporate business, and more importantly, the creditor would become a principal shareholder and could disrupt corporate operations.

A limited liability company is the preferred business entity for asset protection purposes. The LLC offers the same corporate shield as the traditional business corporation so that judgments entered against the LLC will not threaten the owner's personal assets. More importantly, the owner's equity, or membership interest, in a limited liability company is less vulnerable to personal judgments than is stock in a corporation. An LLC membership interest is not an exempt asset under Florida Statutes, but a creditor's ability to collect a judgment from the LLC is limited by Florida Statute ? 608.433. Under that Florida statute, a creditor with a judgment against a business owner cannot seize the owner's LLC membership interests and cannot attack cash or any other assets owned by the LLC. The same statute gives the creditor the right to obtain a charging lien against the owner's LLC interest which lien gives the creditor a right to any distributions of cash or property that the LLC distributes to the debtor member.