The best LLC asset protection approach is unique to you and your situation.
Forming an LLC establishes a separate legal entity responsible for its own contracts and assets. The LLC's owners (also referred to as members) are legally separate from the LLC itself and are generally not responsible personally for debts and other obligations of the LLC. But there are exceptions. For example, if an LLC member does something negligent or intentional (like defrauding a customer), he or she could be held personally liable. But there are many things you can do to maximize asset protection.
Limit Losses by Taking the Chips off the Table
Asset protection is analogous to limiting your losses at the poker table by taking your chips off the table as you win them. No one can see what’s under the table and those chips are not part of the game. This allows you to leave the table with assets, even if you have a few losing hands. For example, by legally separating the operating company from valuable real estate or critical equipment may protect important assets from the risks and liabilities of the actual business. While some people are more likely than others to be sued (like obstetricians, business owners, and landlords), anyone with assets worth protecting should take prudent steps to protect them
Early Planning Is Essential to Successful Asset Protection
Protect your assets while the waters of life are calm! If you attempt to protect assets after a claim arises, you could be accused of "fraudulent transfer". Once an event has occurred (such as an accident or a business failure) or in anticipation of an event (like a eminent divorce), it's probably too late. Asset protection measures deployed after a claim arises can make things worse. Not only could the courts unwind a fraudulent transfer, you and anyone who assisted you with the transfer could be exposed to liability, and you could lose hope for a bankruptcy discharge or a favorable lawsuit settlement.
Asset Protection Doesn't Replace Insurance
Having adequate liability insurance with a proper legal structure is like having
catcher AND a backstop. (It’s usually good to have both!)
Using legal structures to protect assets is like a backstop behind insurance that can protect some of your wealth if you're issued a judgment that isn't fully covered by insurance. Legal structuring plus insurance is a "belt and suspenders" approach that is very often enough to discourage a plaintiff. In addition to helping an injured party be restored, insurance can help an LLC owner survive a fraudulent transfer claim because they are taking “reasonable measures” to avoid injuring others. Industry and professional associations are often helpful in recommending the types and levels of insurance you should consider.
Courts Don't Like "Alter Egos"
Personal and business affairs should be kept separate, or a creditor can claim that the LLC is basically an artificial person or "alter ego" of the members. If the court agrees, it can disregard the LLC as a separate legal entity and hold members personally liable for the debts and obligations of the business. Keep LLC money completely separate from personal finances in a business bank account and ensure the LLC has sufficient capitalization to meet its current obligations. Contracts should be signed on behalf of the LLC, and all written business materials (including websites) should include the LLC designation.
Avoid Personal Guarantees as Soon as You Are Able
When you first start out in business, you may not have business credit sufficient to do things like borrow money or lease space in the name of the business. Thus, you may have to sign a personal guarantee in the event that the LLC became unable to pay its obligations. While this may be unavoidable early on, it’s important that you build your business assets and credit history as soon as possible so you can avoid having to guarantee business obligations with personal assets. Obtaining adequate business credit is a simple asset protection measure that should set as a goal when first starting any business.
Much of Your Strategy Will Depend on State Laws
Many asset protection issues involve state statutes which can vary considerably. For example, benefits from life insurance may or may not be protected from judgment creditors, depending on what state you reside. Florida protects most life insurance awards while California offers much less protection. Some states, like Nevada and Delaware, are considered "havens" for businesses concerned about creditor actions, yet changing jurisdiction may not be successful. It's critical that you obtain asset protection advice for your LLC from a highly trained asset protection expert who is familiar with your state’s law.
Asset protection as a concept includes having sufficient liability insurance, but it may include other legal tools to protect both personal and business assets from exposure to liability claims. The right combination of legal structure and insurance coverage will be unique to your situation, but once you have it, you will have much greater peace of mind.
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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific info regarding your individual situation. The options expressed and material provided are for general information, and should not be considered for the solicitation for the purchase or sale of any product security.