As I’ve noted elsewhere, limited liability entities, including Corporations, Limited Liability Partnerships and Limited Liability Corporations may not provide as much protection as people think. While all of these entities theoretically provide individual protection from corporate acts for individuals owning an interest in the corporation or partnership, in many cases that protection can be illusory, particularly for small companies where the owner or owners are involved in the day to day operation of the business. Specifically, if you are involved in the day to day running of any business, and some operation of the business winds up hurting someone, chances are that you, individually, will wind up being sued. The classic example is that of a truck that is owned by a corporation, being driven by one of the owners of the corporation, which gets into an accident and winds up killing someone. Notwithstanding that the truck was owned by the corporation, the driver is going to get sued as well; and in this case the driver was one of the owners of the corporation. Likewise, if the truck was being driven by an employee of the corporation, but someone who was not an owner, and it turns out that the driver had a bad driving record, or had previous DUI’s, then whoever hired the employee is likely to be sued and, frankly, if that person was the owner of the corporation, you are going to be sued. In other words, although a corporation, an LLC, or a Limited Partnership can shield you from corporate acts, to some extent, it can’t shield you from your own acts or omissions. And most small businesses have their owners managing and running or overseeing the day to day operations of the business.
As I’ve also noted, the best way to protect yourself is getting insurance.
However, there is another consideration; can a business entity act as a shield to prevent someone from taking your interest in the business? LLC’s have gained in popularity over the years because under some circumstances, if someone sues and gets a judgment against one of the owners, it can be difficult for that creditor to try to take that persons interest in an LLC.
But, this is the thing; First, in Florida, a creditor can force the foreclosure sale of a single member LLC; where only one person owns that LLC; so if you are running a small business and form an LLC owned by only yourself, the LLC will provide very little protection against someone suing you for an unrelated debt and then seeing the LLC sold to pay that debt.
A multimember LLC, however, would prevent them from doing that; the most that they could seek is what is called a ‘charging order’ which would only allow them to take distributions owed to you in order to pay the debt; they could not seek the sale of the LLC or take LLC assets.
This is the wrinkle in that, though; what assets does the LLC protect? It protects assets owned by the LLC. And what type of business you are running in the LLC is going to determine whether those assets are worth protecting. If you have a multi unit commercial building, then placing it in a multi member LLC may make a lot of sense; if one member has a judgment against them, the creditor can’t force the sale of the LLC to satisfy that judgment; and the commercial property is probably worth a lot of money.
If, on the other hand, you are running some sort of personal service business; with maybe a leased premises, maybe a leased vehicle, some equipment, and a bank account that has enough money in it to pay a few months of bills, there really isn’t that much to protect. The LLC doesn’t own any real estate, either doesn’t own a vehicle or is making payments on a truck, and has some office equipment and tools. What are you protecting? Not much.
Understand, I’m not saying that forming an LLC is a bad idea; it will provide some protection. However, an LLC, just like a corporation, is not a magic bullet. If you have questions about corporate formation in The Villages, Florida, please call my office.