You can enjoy dual benefits if you establish an asset protection structure for your small business. Your resources will be out of harm’s way, and you may be able to reduce your tax liability.
Limited Liability Company
One structure that can be very useful for a wide range of business owners is the limited liability company (LLC). If you make your business an LLC, you would not be held personally liable if legal actions are taken against your business by creditors or other litigants.
However, there is an exception to the rule. If you directly harm someone in the course of performing your job duties, they could potentially sue you as an individual.
Another mitigating circumstance would be a loan guarantee situation. If you personally guarantee a loan or a line of credit that is used for business purposes, you could be held personally liable.
For the most part, is you are personally sued, the limited liability company and its assets would be protected. However, if you are paid by the limited liability company, the court could issue a charging order that would divert the payments to a creditor or another litigant.
From a tax perspective, a limited liability company is a flow-through entity. This means that you claim profits and losses on your personal income tax returns, and this can be beneficial for many business owners.
Family Limited Partnership
Another asset protection structure that can be ideal for some people is the family limited partnership (FLP). As the name would indicate, the participants in the partnership must be in the same family, and if you establish a partnership, you would be the general partner.
You would have sole decision-making authority, and you would distribute ownership shares to members of your family. They would be limited partners with no ability to make decisions on behalf of the partnership.
To explain through the use of an example, let’s say that you and your children operate a successful restaurant. You could establish a family partnership to hold the eatery.
In addition to the restaurant, you also own a shopping center as an investment property. You could convey this piece of property into a separate family limited partnership.
If someone files a lawsuit because they are injured in the shopping center, the restaurant would be protected. The personal property that is owned by all the partners would also be out of the reach of the litigant.
The properties would be protected if any member is personally sued, so the asset protection works in both directions.
This is another pass-through tax entity, so the profits would be broken up into portions that are distributed to each individual partner. As a result, the income would be taxed at a lower rate than it would be if all of the profits were claimed by the business entity for tax purposes.
A small percentage of people are exposed to the federal estate tax. Most Americans do not have to pay it because there is an $11.7 million exclusion. This is the amount that can be transferred before the tax would be imposed on the remainder. In Connecticut, we have a state-level estate tax with a $7.1 million exclusion.
If your estate will be subject to an estate tax, a family limited partnership can be used to provide estate tax efficiency. This can be done in a couple of different ways, and we will provide details in a future post.
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