3 Common Reasons that LLCs May Fail to Protect Assets

Under Florida law, a limited liability company (LLC) is a business entity that can protect an owner’s assets from the company’s liabilities. An LLC can also protect the owner’s interest in the company from personal judgments against the owner. However, an LLC has its limitations as a vehicle for asset protection.

A Florida asset protection lawyer at Kramer Green can advise you of the benefits and disadvantages of utilizing an LLC for your business and other matters related to asset protection. Here are three common reasons why an LLC may be insufficient to protect assets from the reach of creditors.

  1. A single-member LLC is not a reliable form of asset protection.

    Many LLCs have only a single member or one owner. Unfortunately, this type of LLC does not effectively shield the owner’s business interest and assets from creditor collection efforts. If a creditor can demonstrate that a charging lien is inadequate, the court may permit the creditor to use foreclosure and alternative collection methods to collect on a judgment.

All a creditor must do to prove inadequacy is demonstrate that its judgment will not be satisfied within a “reasonable time” by using a charging lien. As a result, if you wish to use an LLC as an asset protection method, you should be sure to form an LLC with at least two members or owners.

  1. LLCs must be run according to the Operating Agreement.

    Otherwise, the asset protection that an LLC can offer you may not work. An Operating Agreement is a powerful document that represents the members’ agreement as to how the LLC will conduct its affairs and defines the relations between the members and the LLC. For example, an Operating Agreement typically defines the rights and responsibilities of the Manager and outline the general activities and affairs of the LLC. However, if the Manager or members regularly disregard the Operating Agreement, the LLC may look like a sham.

For instance, the following situations may cause a creditor to try and argue that the LLC is invalid, and therefore not effective to protect assets:

a. The Operating Agreement requires that distributions may not occur unless all members consent in writing. The Manager does not bother getting written approval from all or any of the members, but simply makes distributions when he feels like it.

b. The Operating Agreement requires that all distributions be proportional to ownership. Nonetheless, the Manager makes distributions to the members based upon who needs money at the time.

c. The Manager has an LLC credit card. He regularly uses it for personal expenses (i.e., going out to dinner, buying gifts), but reimburses the LLC periodically for dozens of these expenses.

The bottom line is that if the members do not respect the separate identity of the LLC by following the Operating Agreement, neither will the law.

  1. LLCs are funded by transferred assets, all of which are exposed to liability.

    Some assets are “safe” because they present no risk of legal liability for the LLC. These assets include bank accounts, stocks, and bonds. On the other hand, “liability” assets carry the risk of legal liability because they involve third parties. Liability assets include residential rental estate, commercial businesses, or motor vehicles.

Suppose an LLC is sued due to operating a liability asset, such as over an issue related to its operation of residential rental estate. In that case, all of the LLC’s assets are at risk, including its safe assets. In addition, a judgment against the LLC could render all the LLC assets subject to the claims of the creditor looking to collect on that judgment. Therefore, LLCs should always separate each liability asset into a separate entity that contains no other assets. In any case, safe assets should be kept in an LLC with no liability assets to put the safe assets at risk.

Allow Us to Assist You with Your Asset Protection Needs Today

An asset protection attorney at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. can provide you with the assistance that you need to protect your personal and business assets from creditors. We know how to provide you with the maximum asset protection available to safeguard the wealth that you have worked to accumulate over time. Call us today at (954) 966-2112 or contact us online to set up a time to discuss your legal issues with our experienced asset protection lawyers.

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