We answer many of the same questions when we speak with clients, so we know what people are curious about. In this post, we will answer some frequently asked questions about small business asset protection from a legacy preservation perspective.
Why is asset protection important for honest businesses?
If you are starting a business and you intend to be able to take care of all your responsibilities, you may wonder why you should be concerned about asset protection. After all, if you act with integrity, you should never be faced with any creditor problems or legal actions, right?
In reality, you never know what may happen in the future, even if you have the best of intentions.
Plus, you can face personal financial responsibility for accidents that cause damages and/or injuries. You can make sure that there is a layer of protection if you develop the appropriate asset protection strategy.
How does a limited liability company work?
A limited liability company (LLC) can be the ideal asset protection structure for some businesses.
If you establish a limited liability company, you will have a very simple tax situation. Your profits and losses would be claimed on your personal income tax return. This is called “pass-through taxation.”
With an LLC, you would not be personally responsible for the debt that is incurred by your business. On the other side of the equation, if you are personally sued, in most cases the LLC and its property would be protected.
You do have to be aware of the concept of fraudulent conveyances. If you transfer property to an LLC after you know you will be sued in an effort to protect the assets, this would be a fraudulent conveyance, which is an illegal action.
Are there any other commonly used asset protection structures for businesses, professionals, and real estate investors?
Another very popular asset protection tool is the family limited partnership. If you establish a family limited partnership, you would be the general partner.
You would add family members as limited partners, and the limited partners would not have any decision-making authority. The general partner is the only member that can make decisions on behalf of the partnership.
To explain by way of example, let’s say that you are a surgeon, and you own your own medical practice. You are also an investor with four restaurant franchises and an apartment building.
You could convey your practice into one limited liability company, the restaurants into four different limited liability companies, and the apartment building into another FLP.
It would also be possible to convey your personal bank accounts and brokerage accounts into a separate family limited partnership, and your home could be owned by an FLP. If you are personally sued for malpractice, you wouldn’t own this property yourself, so it would not be in play.
If someone is injured in the apartment building, they could not seek to attach any of the other assets that are in all of these separate family limited partnerships.
Remember, as the general partner, you have absolute authority over all of the actions of each of these partnerships. In essence, you control everything, but you own nothing, and this is an extraordinary level of asset protection.
Plus, if you are exposed to estate taxes, assets can be transferred among the partners in a tax-efficient manner.
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Need help now?
We can help if you are ready to take action to put a plan in place. You can schedule a consultation at our Westport or Glastonbury, CT estate planning offices by calling us at 860-548-1000. There is also a contact form on this site you can use if you would rather send us a message.
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