In the past decade plus, limited liability companies, LLC’s, have become increasing popular as the entity of choice for small businesses. The good old corporation has been taking a back seat and is used less and less often. There are a number of reasons why this is so.
For example, the LLC does have more flexibility when it comes to tax issues. See your accountant for more information and whether the difference would be of benefit to you.
The LLC also provides more options for ownership selection that can be of help in certain limited circumstances.
One of the biggest differences, however, is with regard to ‘outside’ liability protection.
Think of liability as being of two kinds: inside and outside. Inside liability means that the problem, whatever it is, happened because of or as a part of the business itself. Say the business borrowed money and defaulted, or a business vehicle was in an accident, or an employee did something to hurt someone, or a business contract was broken. These are issues that come from ‘inside’ the business and are specifically because of the business.
But what we want to talk about today is what might be called ‘outside’ liability—a claim or debt or obligation or judgment or contract that is against you personally but has nothing to do with your business itself. For instance, you are in a car accident in a personal vehicle not on company time, or an investment that is not part of your trade goes sour and you owe money, or a personal debt comes due and you can’t pay it. You get sued, or might get sued, and you worry that the creditor will come after your business and take it away even though the business didn’t have anything to do with the problem.
If you own stock in a corporation, whether all or part of the stock, when your creditor gets a judgment against you personally they can take away all of that corporate stock. They can actually get a court order to have the stock that you own in your business turned over to them and short of bankruptcy or paying them off there’s nothing you can do about it. You now no longer own any interest in your own business, may get thrown out, no paycheck, no money coming in, all assets gone. If there are other shareholders in the company they now have a new partner, your creditor, and this probably won’t sit well with them.
However, in an LLC there is a law, Florida Statute 608.433, that says that the only thing a judgment creditor can do if they get a judgment against you and want to get to your interest in the LLC that you are part of, is to get a ‘charging order’ against your interest. This means that you still own your part of the LLC but if the company pays dividends or distributions, then the creditor gets them. The LLC is charged with paying any distributions, if they are made, to the creditor. If there are no such distributions, the creditor gets nothing and there is really no obligation of the LLC to make such distributions Often, after paying bills, salaries (including yours) expenses, etc. there is nothing left to distribute.
There is one exception to this rule: if your LLC has only ONE MEMBER, meaning you, under certain conditions the court can make you give up all of your rights in the LLC just like in a corporation. A single member LLC can be liable for outside debts, but a multiple member LLC, two or more owners, means that your ownership is protected by law against being taken away.
Certainly there are still problems if you owe money and have a judgment against you, but if the LLC is your source of a paycheck at least you do have some protection.
Remember, this is just a summary of the entire confusing issue of liability and businesses. If you have a problem and need more information, call or e-mail Your Florida Attorney for an appointment, right here in Ocala, and I’ll be glad to talk with you. That’s email@example.com, 352-732-4500.