By Barry Zimmer on March 24th, 2022 in Asset Protection
When you decide to start your own business and work for yourself, you are going to have a lot on your plate. It is a big risk that comes with an even bigger potential upside, and it is satisfying to make your own decisions and do things your way.
Since you are focusing on all of the things that you must do to get on the road to profitability, you may overlook an important detail. If you conduct business as a sole proprietor, your personal assets are not protected from business creditors and others that may file lawsuits.
You may feel as though you are in a low-risk category, but unexpected circumstances can arise, and you can find yourself in a very difficult position.
Limited Liability Company for Small Business Asset Protection
One relatively simple way to protect your assets as a business owner is to establish a limited liability company (LLC). Some people like the sole proprietorship because of the pass-through taxation. You can claim profits and losses on your personal income tax returns.
When you have a limited liability company, you still have pass-through taxation, so your accounting is streamlined. The difference is the fact that your personal assets are protected if your business is sued under most circumstances.
There is an exception if you directly injure someone while you are in the process of doing your job. And of course, if you personally guarantee a loan that is going to be used for business purposes, you would be on the hook even if you have a limited liability company.
The asset protection is a two-way street. If you are sued as an individual, the limited liability company would be protected. However, if a charging order is issued by a court, distributions that are due to you from the limited liability company could be attached.
You should be aware of the concept of fraudulent conveyances as they apply to limited liability companies. An LLC cannot be created to protect assets after you already know that you are going to be the target of a legal action.
Family Limited Partnership
The family limited partnership (FLP) is another commonly used asset protection structure. If you establish an FLP, you would be the general partner, and this would give you absolute decision-making authority.
Family members that you bring into the partnership would be limited partners with no ability to make decisions on behalf of the partnership. The personal property of each partner would be protected if the partnership is sued.
You could potentially establish multiple family limited partnerships to hold different assets to establish multiple layers of asset protection. In addition to the protection, a family limited partnership can facilitate asset transfers between partners at transfer tax discounts.
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