If you are establishing a small business, you should carefully consider the business structure that you utilize. Asset protection should certainly be part of the equation, because you can lose a great deal of personal property if you do not take the right legal steps. In this blog post, we will look at two business structures that are often used by people that have asset protection concerns.
Limited Liability Companies
One of these asset protection structures is the limited liability company. If you establish a limited liability company, generally speaking, your personal assets are separate from the actions of the LLC. As a result, if the business is in debt, the creditors could not touch your personal resources. This is true if you were able to obtain the lines of credit without personally guaranteeing the loans.
You are not personally liable for the work-related actions of employees and co-owners if you are not the sole owner of the LLC. This being stated, if the actions of someone that works for the LLC result in a legal judgment against the business, resources that are owned by the LLC would be available to the litigant seeking redress.
There is one very important factor to understand when you are assessing the asset protection value of a limited liability company. If you are the owner of an LLC, and your own actions cause damages, your personal resources would not be protected. For example, if your negligent actions cause an injury, you would be personally responsible in the eyes of the law.
On the other side of the equation, if you are sued by a creditor seeking satisfaction for a debt that has nothing to do with the business, property that is owned by the LLC would be protected. Along these lines, we should provide some information about fraudulent conveyances.
If you suspect that you are going to be sued, or if legal actions have already been initiated, you cannot transfer ownership of personal assets to the limited liability company. This would be a fraudulent conveyance, which is an illegal action, and the assets would not be protected.
Family Limited Partnerships
A family limited partnership is another asset protection structure that can be quite useful for some business people. As the name would suggest, members of the partnership must be in the same family. If you establish an FLP, you would be the general partner, and the other partners would be limited partners. The general partner has sole decision-making authority over the partnership.
The best way to explain the asset protection value is to provide a hypothetical example. Let’s say that you are a real estate investor, and you make your money as a landlord. You own two shopping centers and three apartment buildings.
Clearly, you could be the target of a lawsuit if someone is injured on one of your properties. To protect your personal assets and your investments, you could convey each of these respective income producing properties into separate family limited partnerships.
If someone is injured in one of your apartment buildings, the personal property of all partners would be completely protected. Plus, in addition to this, the only entity that could be targeted would be the family limited partnership that holds that particular apartment building. All the rest of the property would be out of play.
The asset protection works in the reverse direction as well. If a member of the partnership is personally sued, assets in the family limited partnership would be protected. And if you are exposed to the estate tax, an FLP can be used as part of an estate tax efficiency plan.
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Mark S. Eghrari, Estate Planning Attorney
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