Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

A few days ago an attorney submitted an interesting question about creditor remedies against general partnership interests. As background, a general partnership is an equal partnership among two or more joint venturers as opposed to a limited partnership which consist of a general partner/manager and limited partner/investors. Florida law permits a creditor to foreclose the interest of a partner in a general partnership. Florida law states that a charging lien is the exclusive creditor remedy against limited partnership interests. The question is whether a creditor can foreclose the interest of a general partner of a limited partnership. In other words, is the creditor remedy determined by the type of interest or the type of partnership?

I’ve come across this question previously. I could not find any Florida court decisions on this issue last time I looked. In my opinion, a creditor cannot foreclose the partnership interest of the general partner in a limited partnership. The reason is that the relevant statutes restrict creditors to a charging lien against the interest of a "partner" in a limited partnership and permit foreclosure of "a partners" interest in a general partnership. The limited partnership creditor section does not distinguish general and limited partnership interest when it makes charging liens the exclusive remedy.

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Many single member LLCs have been established to own stock in subchapter S corporations as part of asset protection planning. Before the LLC became the most popular business entity attorneys and accountants typically advised clients to operate a business as a sub-S corporation. As the asset protection benefits of the LLC became better known, the sub-s owner wanted to change his business ownership from a corporation to an LLC. The problem was that there are often tax problems, and also legal restrictions in some professional businesses, associated with converting an s-corp to an LLC.

The solution was to set us a single member LLC and transfer the s-corp shares to the single member LLC. This plan provided better asset protection subject to uncertainty about application of asset protection benefits to a single member LLC. Now that the Olmstead decision has undermined the asset protection benefits of multi-member as well as single member Florida LLCs, people with s-corp shares in a single member LLC are looking for asset protection solutions.

A well-known tax attorney from south Florida asked me whether I thought it possible to create a limited partnership which could elect to be taxes as an s-corporation and then transfer s-corporation stock from an existing LLC to the newly formed partnership. IRS rules prohibit S-corp shares from being owned by an entity taxed as a partnership, but a partnership electing taxation as an s-corp could possibly own the s-corp shares that were previously assigned to a single member LLC for asset protection.

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Florida debtors who are head of household can exempt from creditor garnishment unlimited earnings. Questions frequently arise concerning what types of compensation are included in the statute’s definition of "earnings." For example, commissions earned by an independent contractor are not exempt under the Florida statute. Florida courts have held that wage garnishment protection applies to regular compensation dictated by the terms of an arms’s length employment agreement to perform services that are in the nature of a job.

A Florida bankruptcy court considered whether tips earned by a head of household bartender are in the nature of earnings protected from garnishment. The debtor claimed as exempt wages and tips in a bank account. In this case the debtor’s employer charged all customer’s a flat service charge upon all of the debtor’s sales, and the employer paid the service charges as part of the debtor’s paycheck. The bankruptcy court held that the tip payments were exempt after deposit in the debtor’s account. The court noted that the tips were paid as par of a regular bi-weekly paycheck and that there was no allegation that the tips could not be properly traced and identified as earnings of a head of household. In re Holmes, Case No. 09-16564, Southern District of Florida.

The court did not address the issue of cash tips paid directly from customers. As a practical matter, a creditor could never garnish a cash tip before it is paid and most servers do not deposit cash tips in their bank account.

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