Asset protection for the small business owner – It is easier than you think

By William A. O’Leary

When people think about asset protection, they tend to conjure up images of complex financial arrangements—often involving offshore asset protection trusts— arranged by mysterious agents. While this type of sophisticated asset protection planning may be an option for certain high-net-worth individuals, the vast majority of us do not need it. There are a number of relatively simple, “low-tech” options available to Florida small business owners.

Choice of Entity

Many business owners choose to operate their companies through legal entities, which often is the wiser course than operating as a sole proprietorship. Once the owner decides to operate the business through an entity, the next question involves the type of entity to use.

There are a variety of factors to consider, such as management and tax considerations. Creditor protection also is an important consideration.

Eventually, the choice of legal entity typically comes down to either a limited liability company (LLC) or an S corporation. If there is more than one owner of the business, operating as an LLC offers significantly greater asset protection.

With an S corporation, a creditor of a shareholder can foreclose on the stock and become a new shareholder of the company. In contrast, a creditor of one of the LLC’s owners is limited to the remedy of a “charging order” against the owner’s LLC interest.

A charging order is designed to shield the LLC’s assets from the debtor-owner’s creditors, and thereby protect the LLC’s other owners from the personal debts of the debtor-owner that are unrelated to the LLC and its business. A charging order is a court order that directs the LLC’s management to pay to the owner’s creditor any distributions of income or profits that would otherwise be paid out to the debtor-owner.

With a charging order, creditors only obtain the debtor-owner’s “financial rights,” and cannot participate in the management of the LLC or force the dissolution of the LLC and distribution of the business assets. Creditors cannot order the LLC to make a distribution subject to the charging order.
Because owners retain all management authority, including the timing of distributions, creditors are forced to wait patiently until distributions are made. In fact, management can decide to suspend distributions altogether to keep company funds away from creditors.

Creditors who obtain charging orders could end up with nothing because they cannot force distributions. So, charging orders often lead to the settlement of claims for cents on the dollar.

An LLC also is the preferred choice where there is only one owner of the business, although the level of asset protection is not as great as with multiple-owner LLCs. As a general rule, a creditor of the owner of a single-owner LLC is limited to a charging order remedy. However, the creditor of a single owner can go beyond a charging order and foreclose on the owner’s entire LLC ownership interest where the charging order is not an adequate remedy, such as where it can be shown that the debtor-owner will not be able to pay the debt within a reasonable time. This is often the case where the LLC’s business consists of non-income producing assets that do not generate distributable income.

A sole owner without any partners in the business can achieve the enhanced creditor protection of a multiple-owner LLC by creating a second LLC wholly owned by the same business owner and having the second LLC own a portion of the operating LLC along with the business owner. The second LLC must be managed by a different person even though he or she has no ownership. Florida law permits this type of structure.

Additionally, the business owner would continue to enjoy the tax advantage of having their operating LLC treated as a disregarded entity because the second entity having an ownership stake in the operating LLC, itself being 100 percent owned by the business owner, would also be considered a disregarded entity. This is known as a “disregarded entity multi-member LLC” and has been approved by the Internal Revenue Service

For a business owner desiring the tax advantages of being an S corporation and the asset protection benefits of being an LLC, there is a way to have their cake and to eat it too. An LLC can be created and a separate “S” tax election can be made so that the LLC is taxed as a corporation instead of a partnership. The owner’s CPA should be consulted on the pros and cons of doing this.

Spousal Ownership

A business owner who is married has an extremely powerful asset protection tool at their disposal, “tenancy by the entireties.” This provides legal protection to the marital unit that lasts as long as the marriage is intact and both spouses are alive. It cannot be destroyed by one spouse acting alone. Assets owned jointly by a husband and wife are protected from creditors of one spouse. If a protected asset is sold, the spousal protection follows the sale proceeds.
If both spouses owe a joint debt to the same creditor, their joint assets are not protected. If an asset is owned by just one spouse, such as where one spouse owns an asset individually before the marriage or where one spouse acquires an inheritance after the marriage, that asset is exposed to that spouse’s creditors. To solve this problem, upon entering the marriage that spouse can convey the individually owned asset to both spouses jointly, which would create tenancy by the entireties protection.


Florida homestead law protects a principal residence from the claims of most non-bankruptcy creditors, with no monetary limit. Therefore, from an asset protection standpoint, small- business owners are well-served to invest assets in their home because homestead protection is available to permanent Florida residents.

Homestead protection continues after a home is sold as long as the sale proceeds are reinvested in a new homestead, although it is advisable to deposit the sale proceeds into a dedicated bank account called “homestead account.” The Florida homestead protection is so strong that assets otherwise exposed to creditors can be shielded by investing them into a homestead property or paying down a mortgage on an existing homestead, even in the face of a known creditor.

Life Insurance

Life insurance is a wonderful asset-protection vehicle. The cash surrender value of a permanent life insurance policy insuring a Florida owner is protected from the insured’s creditors and from the beneficiaries’ creditors. Thus, high-risk business owners can achieve significant asset protection by investing assets into a permanent life insurance policy.

The death benefit paid on an owner-insured policy, in addition to being income-tax-free, is protected from the insured’s creditors, unless the insured’s estate is designated as the policy beneficiary, in which case the death benefit is subject to the insured’s creditors. Careful attention must be paid if the death benefit is payable to the insured’s living trust to avoid exposing the death benefit to the insured’s creditors. The death benefit is not protected from a beneficiary’s creditors, unless the policy is owned by a separate life insurance trust.

IRAs and Other Retirement Plans

Many business owners have set up retirement plans or IRAs. In addition to being tax-advantaged, these retirement vehicles are great ways to protect assets from creditors in Florida.

Traditional and Roth IRAs are protected if held in a Florida account and owned by a Florida resident. There is no dollar limit to the protection as long as the account owner is not in bankruptcy.

The asset protection continues when an IRA is inherited outside of bankruptcy. Required minimum distributions, once made, are not protected, although rollovers are protected. A spouse designating a non-spouse as the IRA beneficiary needs to be mindful of Florida’s elective share statute which prohibits disinheriting a spouse.

Other retirement plans are protected without limit if they are “qualified plans” under the Employee Retirement Income Security Act (ERISA). The assets of such plans are protected from creditors of their employer sponsors and the employees/participants.

If the business owner is the only plan participant, the owner is well advised to cover other non-owner employees as participants to ensure protection of plan assets. Protection is lost once distributions are made.

Plan assets are not protected in divorce upon entry of a qualified domestic relations order. Finally, deferred compensation is not protected because it does not qualify as wages.


Testamentary trusts offer tremendous asset protection. Unlike irrevocable trusts created during life which are sometimes used in more elaborate estate plans, a testamentary trust is created inside of a will or living trust but lies dormant during life, only coming into existence at death.

Let’s say you want to make a bequest to a child who is a spendthrift or has a substance abuse problem and you are fearful that they will squander their inheritance. Or, let’s say your child is married to a spouse you do not like and the last thing you want is for your child’s spouse to get your child’s inheritance upon divorce. A testamentary trust is one trust vehicle for solving your problem. Your bequest is paid to the trust for your child’s benefit instead of to your child outright. Hence, the trust’s assets are shielded from your child’s creditors and spendthrift ways.

In summary, there are a number of fairly easy ways for a small business owner to protect assets. Asset protection is not just for the wealthy.

OLYMPUS DIGITAL CAMERAWilliam A. O’Leary is an estate planning, probate and tax attorney with Glazier & Glazier, P.A. in Jacksonville. He can be reached at (904) 997-1033 or

Leave a Reply