Many business owners assume that holding assets in a corporation provides complete protection against personal lawsuits. In this video, Florida asset protection and estate planning attorney Joe Seagle explains why that assumption can leave a business owner’s shares exposed. If a shareholder loses a personal lawsuit, a judgment creditor may be able to seize the shareholder’s corporate stock, potentially gaining ownership of some or all of the company.
Joe explains why converting a corporation into a properly structured Florida limited liability company (LLC) may provide stronger protection against outside creditors. In Florida, a multi-member LLC may qualify for charging order protection, which generally limits a creditor to receiving distributions that would otherwise be paid to the debtor-member. The creditor does not automatically become an owner or gain control of the LLC. A carefully drafted operating agreement may provide additional safeguards by addressing how distributions are handled when a member becomes subject to a charging order.
Converting from a corporation to an LLC does not necessarily require the business to abandon its existing federal tax treatment. An LLC can elect to be taxed as an S corporation or C corporation, potentially allowing the business to maintain its tax classification while improving its legal structure. Joe explains why corporation-to-LLC conversions are frequently considered as part of a broader Florida asset protection strategy designed to protect business ownership interests from personal judgment creditors.
Transcript:
I hold everything I have in a corporation, so I’m totally protected from people trying to sue me, and if they sue me, they can’t take anything, correct? Not exactly. This comes up all the time with us, and unfortunately, it’s just not the case that a corporation gives you all the protection that you need for asset protection.
I’m Joe Siegel, I’m a lawyer in Florida, and I handle asset protection and estate planning strategies for people all over the state of Florida. And it often comes to us that people have corporations. I’m talking about the the the name of the entity ends in INC or Incorporated or Corporation. And what people don’t understand is that
Corporations do not have charging order protections. So even if you had three or four or five or ten, fifty people as shareholders of this company, if you are one of the shareholders and you get sued and you lose the lawsuit, your judgment creditor can simply take your shares in that company and now they own.
whatever you owned of that company. And if you were the sole owner, of course they own the whole company. If you owned 50% of that company, 95% of that company, they now own what you owned in that corporation. So for that reason, whenever we’re doing a strategic design for a client to to plan their estate planning and their asset protection planning, we will often recommend converting the corporation into a limited
Liability company. A lot of people ask us, well, why would I convert this into a limited liability company? I’ve got it as a corporation. It’s been a corporation for 25 years, 30 years. Why would I convert it now? The reason you would want to convert a corporation into an LLC is because LLCs do have charging order protections so long as you have more than one member in the LLC. And this is Florida.
Not talking about Wyoming. Wyoming, if you live in Wyoming and you have a Wyoming LLC, yes. If there’s one member, you have charging order protections. If you have a Wyoming LLC and you live in Florida and you have one member, you do not have charging order protections. It requires more than one member inside the LLC for charging order protections to apply. Now everybody goes, well, what is a charging order?
A charging order means that in this case, let’s say you own ninety-five percent of this LLC now, and someone sues you and they win and they come and they try to take everything you own. And one of the things you own is 95% of this LLC. Well, with the corporation, remember, they could take it. They own 95% of the company now. With an LLC,
You own 95%, someone else owns the other 5%, they get a charging order only against that 95%. Charging order means they have a right to receive any distributions, any cash money that you would be entitled to receive under the operating agreement agreement, under the company’s operating agreement, when it decides to distribute money.
They would receive that money instead of you. They’re not going to own the company, they’re only going to get that. But even better, you can build that operating agreement to say that if any member is subject to a charging order, no distributions are to be made to that person until the charging order is dissolved. So
the money just accrues and is held in escrow by the company for the member until the charging order goes away. So there are certain things that we can build into the operating agreement, things that we can do to protect even against the charging orders out there. You’re still going to owe tax on the money that was made and now you’re not going to have the cash to pay the tax.
But I would hope that you have money somewhere else that you can use to pay the taxes on that phantom distribution that you got that you never really got your hands on.
So anyway, this is the biggest reason that we always recommend, almost always, recommend that we convert from a corporation to an LLC. Now, a lot of people go, but wait a minute, this is an S corporation or it’s a C corporation. It can’t be an LLC. It’s always going to be an S or a C corporation. Well, LLCs can elect.
To be taxed as corporations and they can elect to be taxed as C or S corporations. So the LLC, as far as the IRS is concerned, nothing has changed except usually the last three letters at the end of the name of the company. It’s gone from being an INC to being an LLC. So for that reason, we do these conversions all the time to get, as part of a an asset protection strategic design, to get that.
Charging order protection for the members to protect their interest from outside creditors coming in and trying to take the membership interest away. Because again, like I said, if it’s a corporation, those outside creditors can come in and just take the stock, but they can’t take the membership interest. All they get is a charging order, and we can deal with that. So if this is the kind of content you want to keep seeing, please follow us. Like, subscribe, comment below, let me know what you think.
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