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The Yau Law Firm
Focused on Protecting Businesses and Representing the Injured

LLC not Always the Safest Entity for Protecting Personal Assets

Starting your own business can be a daunting task. Did you know that there are several different types of businesses? The way your personal and business assets, and even your tax filings, are treated differently depending on the type of entity you create. Whether you want a corporation or a partnership, or you desire to be a sole proprietor in business, the Yau Law Firm knows how to handle issues that arise from business ownership.

Today’s blog addresses Limited Liability Companies (LLC’s).

Limited Liability Companies gained popularity in Florida in the 90’s after tax restraints were lifted on such corporations. Limited Liability Partnerships next arose when legislature allowed for the limited liability protection to be extended to all partners of the corporation. Since then the Florida Revised Uniform Limited Partnership Act of 2005 has amended limited partnerships to afford them more protection. This protection has not however been given to LLC’s.

Limited Partnerships and Limited Liability Companies share some common features when protecting against outside liabilities. One key feature is how to deal with a partner that cannot pay back a creditor. The creditor in this case may secure a charging order, a decision from the court ordering the payment of a debt, by stocks, funds, or land, in the amount owed. In the case of a limited partnership, this is the only remedy available to a creditor. In contrast, an LLC is open to different remedies.

In a LLC, a creditor may earn the right to receive all distributions related to a debtor’s interest through a charging order. In essence this is like a wage garnishing. Any income that comes into the LLC, in the name of the debtor, will be given directly to the creditor. Where an LLC has several partners, those partners’ assets will not be bothered. The rights of a charging order only reach the debtor.

However, in the case of a single-member LLC, there is no such protection because a creditor may be granted governance rights: the right to take over a corporation. The one protection afforded to single-member LLC’s is a chapter 7 bankruptcy. In chapter 7, the debtor transfers membership interests to the estate (sometimes the family of the creditor). The bankruptcy in essence changes the appearance of a single-member LLC to that of a multi-member LLC (the members being the creditor and the estate). Once this occurs the estate will have a better chance of protecting the assets.

The laws on LLC protection are state specific and are governed by legislature and case law. Several alternatives exist which may further protect an LLC from outside liability including issuing additional shares of the company, incorporating the business in another state or country, or holding an interest in the LLC as tenants by the entirety (sharing the interest with your spouse). If you or someone you know is having trouble protecting their business, or would like advice on how to further protect their assets, contact the Yau Law Firm.

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