Asset protection in business is challenging. Our son called us yesterday and wanted to discuss how he should structure a business for an apartment building he is thinking of buying. He described his business plan and then wanted to discuss which type of entity he should use. He mentioned that he thought of layering using an LLC (Limited Liability Company) with an S Corp for the partner. At that point we explained to him that he wanted to structure using the LLC for both layers. When he asked why, we had to explain.
Asset protection is a double swinging door. Many people tend to plan their asset protection from only the business side, to protect their personal assets if their business fails. This is a mistake. Of course it works just fine when your business gets in trouble. It blocks creditors coming through the door after you and your home and savings account and other personal assets. But what about when you get in trouble personally? Say you are in an accident or suffer an illness and you can’t pay your bills.
When starting a business, everyone wants to structure it for asset protection. They want to protect, their house, summer cabin, bank accounts and retirement nest egg. But if they thought about it they would realize that their business is their most valuable asset. It is basically the source of all their assets. When you consider asset protection you should see the value of both your personal and business assets. Even though business owners do tons of “asset protection” trying to protect their personal assets, they need to protect their businesses too. Many businesses are lost when a personal disaster strikes.
Business structuring using an LLC has double asset protection. Like a corporation, an LLC has all the aspects of the corporate shield, but it also has partnership charging order protection. This gives an LLC a distinct advantage. The LLC protects from both sides of the door. You may be wondering, “If LLCs are so good why are corporations still the most common business entity? It is because LLCs plus charging order protection are “relatively” new. Corporations have always been the “standard business entity.” People have heard of them and so they use them. Still when you do the research you will probably find that an LLC is the best small business entity.
I am an executive of a start-up company that made me part of the executive management. My income from my position with my salary, bonuses and dividend income from my stock will afford me a mid to high seven figure income per year. I want to protect these assets and any future acquired assets. How can I best achieve this? George M., Florida
You are smart to plan your asset protection ahead of time. There are certain questions you need to consider first. How risky is your business? Are you a detail person? Do you have a family? You are living in a great state to protect your home because Florida has an unlimited homestead provision. It is always a good idea to hold your home in your own name for tax reasons and Florida makes this easy. I recommend that you form a living revocable trust. Depending on your other assets and your family situation you could consider forming a Family Limited Partnership FLP, or a Limited Liability Company (LLC) to hold those assets you want to protect. Planning should include not just liability but also tax considerations and ease of management. I have a “How to Make It and How to Keep It Boot Camp
” to help people like you on a personal level.
In building a bullet-proof asset protection plan, which state is the best to file a limited liability entity, Wyoming or Nevada? and which entity would be the most effective, an LLC, LP, “S” Corp or a “C” Corp, and what would your fee be for such?
There is not a “best” state to file a Limited Liability Company (LLC) in any more. It used to be that Nevada and Delaware had more favorable laws. However, all states have now made changes in their laws so that they work just as well. No state wants to lose this revenue. In fact if you file in a foreign state (a state other than your own), most states tax you anyway. Now it is best to file in your own state. It is often more costly to file in a foreign state, because of additional fees and double taxes.
Which entity would be most effective depends on what you are trying to accomplish. For instance, if you are holding a piece of rental property an LLC is usually a good choice. If you plan to grow a huge company and go public you will need a corporation. Fees for legal entities depend on hours involved. I go through this discussion in detail in my LLC Wizard Course.