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September 21, 2011

Understanding “Inside” And “Outside” Asset Protection

Oftentimes, when proposing an asset protection strategy to a potential client, the concept of “inside” and “outside” liability protection comes up.  The purpose of this blog is to explain the difference between the two and why both are important to any good asset protection plan.  In Florida, one of the most common ways to obtain both inside and outside liability protection is through the formation or a multiple member LLC.  Thus, we will use the LLC as our example in this case.

In regards to “inside” protection, a Florida multiple member LLC protects the assets of the LLC owners (commonly known as “members”) from exposure to liabilities incurred by the LLC itself.  For example, if the LLC is formed to own rental property and an individual is injured on the property, that person may have a claim against the LLC and its assets.  However, the individual generally will not have a claim against the individual members of the LLC or their personal assets.  The LLC prevents these “inside” liabilities from affecting the “outside” personal assets of the individual members.

In regards to “outside” protection, a Florida multiple member LLC protects the LLC’s “inside” assets from being adversely affected by liabilities incurred by the LLC members.  This is done through a legal mechanism known as a “charging order.”  For example, if a member of the LLC injures an individual in a car accident, that individual might have a claim against the member personally but generally will not have a meaningful claim against the assets owned by the LLC.  Thus, “outside” liabilities do not penetrate the LLC to affect “inside” assets.  It should be noted that Florida single member LLCs are not treated the same way as multiple member LLCs.  This is the result of the 2010 Florida Supreme Court decision of Olmstead v. FTC, in which the Court held that, with respect to single member LLCs in Florida, the charging order was not the exclusive remedy available to a creditor holding a judgment against the sole member.  Ultimately, in the Olmstead case, the Court ordered the debtor to surrender all right, title and interest in his LLC to satisfy an outstanding judgment.  For more information, check out our additional content on charging orders as well as the Olmstead case and subsequent legislation.

knowledgeable asset protection attorney is essential to formulating and implementing a successful asset protection strategy.  Care must be taken to avoid issues such as fraudulent transfer which can cause a court to unwind asset protection measures.  The best asset protection plans are in place well before they are ever necessary, as this is the strongest way to avoid any complications.  If you would like to know more about establishing your own asset protection strategy, contact an Attorney in Jacksonville with the experience to help you get started.