The LLC Myth: Why the LLC is not the Asset Protection Tool you Think it is

Julianne Frank   All rights reserved 2019

“If I form an LLC it will protect me from my creditors”. I hear this a lot. If you believe it, you are probably still leaving carrots for Santa’s reindeer.

An LLC is a useful entity form for certain types of businesses. It can provide tax advantages. You can create your LLC as a “disregarded entity”, meaning that it has no independent tax liability and does not have to file a tax return. The income and loss generated by the business pass directly to the owners. An LLC can also provide flexibility in structuring its internal operations, it can operate more like a partnership than a corporation and it can provide simplified means for succession planning.

An LLC does not, however, magically create a fortress. Unless it is set up with the appropriate mechanisms, an LLC with a single member cannot serve as an asset protection device. Even a multimember LLC, with members who are only passive, might not survive an attack.

In addition to having multiple active members, an LLC must have a Comprehensive Operating Agreement with terms that address the various concepts that have evolved in the courts related to asset protection issues. An  LLC with no operating agreement is controlled by the default provisions under Florida law, and those do not provide adequately for asset protection. A proper operating agreement has all of the “bells and whistles” necessary to wreak havoc on attacking creditors. I will discuss the elements of a good operating agreement in later posts. The moral here is to not be fooled by LLC mythology.