How an LLC Operating Agreement Can Protect Your Assets

An LLC can be an effective asset protection tool in Florida in two ways: (1) protection from claims against the LLC and (2) protection from claims against the LLC member.

Claims Against the LLC

First, the LLC shields its members from individual liability from claims made against the LLC. A person with a claim against the business can recover on a judgment against the LLC only from LLC assets rather than from the personal assets of individual members. This protection is referred to as a “corporate shield.” People with multiple investment assets should have each asset owned by a separate LLC to isolate each LLC’s exposure to only the affected LLC’s own assets.

There are exceptions to this legal shield. One exception is when a member personally guarantees an LLC obligation. The creditor may sue the owner individually based on the guaranty whether or not the creditor sues the LLC. Another exception is when an LLC is established to defraud creditors. The affected creditor may pursue an action to pierce the LLC liability shield and hold the LLC owners liable.

Claims Against the LLC Member

The primary asset protection purpose of an LLC is the protection of a member’s LLC interest from the member’s individual creditors.

While a judgment creditor can levy upon and force the sale of a debtor’s stock interest in a corporation, the same creditor is limited by Florida law to a charging lien against the debtor member’s interests in LLC distributions, if any are made.

The extent to which an LLC protects a member’s LLC interest from their individual creditors depends significantly upon the terms and conditions of the Florida LLC operating agreement.

To best protect the LLC membership interests from creditors, an LLC operating agreement in Florida should include at minimum the following features:

• Distributions of LLC cash flow should not be required at regular intervals.
• In kind distributions of property should be permitted.
• Members should not be entitled to a return of their capital contributions.
• Tenants by entireties ownership of membership interests should be expressly permitted.
• Judgment creditors with charging liens should be held liable for capital contributions.
• The LLC should deny voting rights to involuntary transferees.
• Appropriate provisions to comply with S-corp taxation rules where appropriate.

The above legal concepts are not included in a typical simple form LLC operating agreement in Florida. But all these features, and others, are important for effective asset protection of an investment through a Florida LLC.

About the Author

Jon Alper is a nationally recognized attorney specializing in asset protection planning. He graduated with honors from the University of Florida Law School and has practiced law for almost 50 years.

Jon and the Alper Law firm have advised thousands of clients about how to protect their assets from creditors.