Businesses come in many shapes and sizes these days. Perhaps it is a family-owned restaurant, an automobile repair shop, a boutique, or even residential or commercial rental property. Owning a business creates the opportunity for financial gain, but for the unwary, but it also creates an enormous risk of financial disaster if proper planning isn’t in place.
Asset Protection Requires Advance Planning or it Might Be Too Late to Protect Yourself and Your Assets
All business owners should formally incorporate your business prior to beginning operations, otherwise both their business and personal assets are in jeopardy! Some important facts business owners need to know:
- By the time an incident giving rise to a potential lawsuit or claim occurs, and certainly after a lawsuit is filed, it is too late to protect assets;
- Moving assets after an incident occurs or lawsuit is filed may actually make your current situation even worse;
- Separating your business assets from your personal assets by forming a formal business entity is key to protecting assets
What Business Planning is NOT
There are common, and understandable, misconceptions among many business owners regarding asset protection. Prior to beginning business operations, owners must give full attention to understanding the ramifications of how they structure their business.
One misconception is operating a business under a business name is sufficient to protect assets. Individuals who do so are considered sole-proprietors and partners are considered to be a general partnership. Those sound like official business structures, but they are not. There is no legal separation between a person and their business in these situations, and they provide no asset protection. In a general partnership one owner may be personally liable for the actions of a business partner. In these situations, the owner will be personally liable for business liabilities including taxes, debts, and even money owed as a result of a legal proceedings. In a lawsuit, even a decent plaintiff’s attorney will be able to “pierce the corporate veil” (the legal term for attempting to negate the protections of a busines entity) without any roadblocks because there is no “corporate formation.”
Another common misconception is that simply creating an entity through the Secretary of State is sufficient to protect assets. However, filing the proper paperwork with the Secretary of State is only the beginning. Forming a business entity, in and of itself, is of no value if the business entity is not properly utilized.
Another significant misconception is that establishing a formal business entity is a DIY endeavor. Multiple DIY services claim to help properly set up business entities for minimal fees. However, as the old adage goes, ‘you get what you pay for.’ These entities usually provide only the most basic services and boilerplate templates for organizational and operational documents. Without a full understanding of a person’s specific situation and business, these documents most likely fail to provide very important financial protections. The devil is always in the details, and DIY business entities most often miss those details.
There are a variety of corporate structures that provide asset protection, and each comes with different pros and cons. Some of these options include Limited Liability Partnership, C-Corporation, S-Corporation, Limited Liability Company. One of the most common entities is the Limited Liability Company (“LLC”), discussed below, because it provides both asset protection and is more easily managed than other corporate forms.
Basics of a Limited Liability Company
An LLC is an entity separate from its owner(s) and created through filing specific documents with the Secretary of State. A single owner may form a single-member LLC. If there are multiple owners, a multi-member LLC may be formed. This type of corporate structure provides important asset protection by separating business assets from personal assets. If formed in certain states (such as Texas or Arkansas), the owner will have charging order protection that prevents a creditor from obtaining your actual ownership interests in the LLC. In an LLC, the owner can still maintain complete control of daily operations and does not have to have a board of directors. There are also various tax advantages and estate planning strategies available by choosing to form an LLC that are not available with other forms of corporate structure options.
The LLC structure builds a wall around business assets and separates them from personal assets. This keeps personal assets safe from business liabilities and business assets safe from personal liabilities.
Series Limited Liability Company
Some states, including Texas and Arkansas, allow for the establishment of a series LLC which provides even more asset protection options. A series LLC is a great option for residential and commercial real estate investors to utilize. A series LLC allows an owner to create one LLC but break it into different “series” where a single asset, or multiple assets, may be placed into each series.
There are multiple advantages to utilizing a series LLC. Each individual series has its own legal existence for ownership and liability purposes. Liabilities of a series is limited to the assets of that particular series. This avoids the need to form multiple LLCs, reduces startup costs, provides the same type of protection, and makes management more efficient.
Failing to Plan is Planning to Fail
There is no way to guarantee complete asset protection. However, implementing a comprehensive and tailored asset protection plan can build walls between your business and personal assets. This makes it much harder for anyone to seize your business and personal property, and ultimately harder to destroy your financial well-being.
Ben King joined Ross & Shoalmire, PLLC in 2019. He focuses much of his practice on estate planning and helping clients implement asset protection strategies. As a former personal injury and plaintiff attorney, his experience with settlement and resolution of high-stakes complex litigation matters brings unique insight to the firm. His professional memberships include the National Academy of Elder Law Attorneys, and the Bar Association of Texas, Northeast Texas, Arkansas, and Texarkana.