BUSINESS PROTECTION
Asset
Protection for the Business Owner
Asset protection has become an important
part of business planning 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 not 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.
