As they say, we live in a litigious society, so it is important to protect your personal assets if you are a small business owner. There are a couple of different structures that are typically utilized, and we will look at them here. If you would like to discuss them with one of our attorneys in person, simply send us a message requesting a consultation we will get back in touch with you promptly.
Limited Liability Companies
A very commonly used asset protection structure for small businesses is the limited liability company. If you were to go forward as the sole proprietor, if your business was sued for some reason, your personal assets would be available to the litigant seeking redress. From a legal perspective, there would be no difference between your resources and assets that are tied up in the business.
To provide a layer of protection, you could establish a limited liability company. When you do this, there is a clear separation between your assets and assets that are the property of the LLC. If someone is injured on the commercial property, or if you or an employee were to cause damages in some way, your personal property would be protected. Conversely, if someone sues you personally, assets in the limited liability company would be out of play.
There is something to take into consideration when you are looking at the value of a limited liability company for asset protection purposes. You are not allowed to convey personal assets into a limited liability company after you become aware of the fact that you are facing legal actions. This is looked upon as a fraudulent conveyance, and this type of activity is against the law.
In addition to the asset protection, there is a streamlined tax situation when you establish an LLC. You don’t have to pay taxes for the business along with separate personal income taxes. There is “pass-through” taxation, so you just claim business profits and losses on your personal income tax returns.
Family Limited Partnerships
A family limited partnership is another asset protection tool that can be quite useful for some people. The best way to explain the value of FLPs would be to provide a hypothetical example. Let’s say that you are a physician, and you are also a real estate investor. You own a medical practice, and you have three apartment buildings. Of course, you also have significant personal resources including homes, bank accounts, and brokerage accounts.
If you were the direct owner of all of this property, and someone was seriously injured or killed in one of your buildings due to an act of negligence, all of it could be attached through a legal judgment. To prevent this possibility, you could convey each separate piece of property into a different family limited partnership.
You would be the general partner if you establish a family limited partnership, and family members that you choose would be limited partners. The general partner has absolute decision-making authority over the partnership. Getting back to our example, if someone sues the owner of one of the apartment buildings for negligence, it would be a single FLP. The rest of the property would be protected. Plus, you could leverage the property and maintain very limited equity in it, so there would not be a much for the litigant to take.
The asset protection works in the reverse manner as well. If you or any of the limited partners are personally sued, the assets that are in the family limited partnerships would be protected. Of course, your bank and brokerage accounts would be in a family limited partnership, so they would be protected if you were the target of a lawsuit.
Asset protection is the main reason why most people use family limited partnerships, but there can be another benefit. High net worth individuals can face exposure to that federal and state-level estate taxes. Resources that are held in family limited partnerships can potentially be transferred between partners at a transfer tax discount.
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Michael Robinson, Estate Planning Attorney
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