If you are going into business for yourself, you have to make some choices. Asset protection should be taken into consideration, and from a retirement and estate planning perspective, you should have a succession plan.
Let’s look at the most commonly used asset protection structures, and we will then move on to the second part of the equation.
Small Business Asset Protection
The limited liability company (LLC) can be the right choice for a wide range of small business people. When you establish an LLC, you separate your personal property from your business. Generally speaking, if the business is sued, your personal property would be protected.
There are a couple of exceptions to this rule. If you are personally responsible for damages that were incurred while you were conducting business, you could be liable. You would also be on the hook if you personally guarantee a loan that is used for business purposes.
On the other side of the coin, if you are sued for a matter that has nothing to do with the business, the business assets would be protected up to a point. A court could issue a charging order that would essentially place a lien on distributions made to you from the LLC.
Aside from the asset protection, there is a tax benefit. When you have a limited liability company, you claim business profits and losses on your personal income tax return. This streamlines your accounting, and you don’t have to pay a separate business tax.
Family Limited Partnerships
Another asset protection structure that some people use is the family limited partnership (FLP). If you establish an FLP, you would be the general partner, and members of your family that you include in the partnership would be limited partners.
You don’t have to be concerned about the limited partners making decisions that you do not agree with, because you would have absolute decision-making authority.
The core structure works in a manner that is similar to the limited liability company. Let’s say that you own a shopping center, and you place it into a family limited partnership. If someone is injured at the center, property that is personally owned by the members the partnership would be protected.
The reverse asset protection is there as well, because the shopping center would be protected if any member is sued.
To expand the example, let’s say that you own two apartment buildings along with the shopping center. You could convey each of the apartment buildings into separate family limited partnerships. In this manner, a litigant that is injured in the shopping center would not be able to go after the two apartment buildings.
Succession Planning for Small Business Partners
If you have a partner or partners in your small business, you can make a buy-sell agreement the centerpiece of your succession plan.
To execute this strategy, you and the other partners determine the value of a share in the business. The partners give one another the ability to sell their share to the other partners at the agreed-upon price if and when they want to step aside.
When buy-sell agreements are used for estate planning purposes, the partners take out life insurance policies on one another that are equal to the value of a share in the business.
Individual Retirement Accounts
There are individual retirement accounts that can be used by self-employed individuals and small business owners. You can establish a self-employed 401(k), and Simplified Employee Pension Plans (SEP IRAs) can be used by self-employed folks and businesses that have a handful of employees.
The Savings Incentive Match Plan (SIMPLE IRA) is a tax-deferred employer-provided retirement plan that can be used by businesses with 100 or fewer employees.
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Mr. Nirenstein is licensed to practice before the courts of the State of Connecticut and the United States District Court. He is a member of the Connecticut and Hartford County Bar Associations, and the Estate and Probate, Elder Law, Business Law and Real Estate Sections of the Connecticut Bar Association.
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