Asset protection comes in several different forms. While there’s no “one size fits all” strategy secondary to the various liabilities of different assets there are some common elements. One common element is the use of an LLC to hold or encumber the Assets. It should be noted there are different types of LLCs and one is more protective and private then the others. An LLC, correctly set up and maintained for asset protection is a way to secure your financial future.
As an example, LLCs help shield you from creditors and runaway juries who tend to award for more than you are able to pay. If you personally own an apartment building and one of your tenants slips and breaks her leg, she could sue you personally. Should a jury decide in her favor she could take you for everything you have, Put the building into an LLC and she would sue the LLC with liability limited to the assets in the LLC—she cannot come after you personally.
Now, flipping the situation around’ with creditors coming after you personally for any reason, with your valuable assets an LLC they are protected from your liability. Say you ran into someone with your car, bicycle, etc. and they successfully sue you. The Creditors may take a portion of whatever the LLC has paid out to you, but nothing more—they can’t touch the LLC or the assets it holds. This is known as “Charging Order Protection”. Your assets are protected from your personal liability because they are tied up in the LLC.
While each state may use different regulations, the IRS defines a limited liability company, or LLC, merely as a “business structure” and leaves the rest of to the states to define. An LLC can have one or more owners. These owners can be individuals, corporations, or even foreign entities. LLCs are a hybrid, of sorts, between a corporation and a partnership where the financial liability of those involved, as owners or partners, is limited to a specific sum of money or value.
Something to be mindful of is that creditors may try to prove that the LLC is an extension of you personally. This is known as Alter-Ego. As an example, don’t use the LLC accounts as your personal “piggy bank”. Asset protection by an LLC in this case would not typically work. So, a good rule of thumb is to go ahead and incorporate an LLC but be sure compliance is initiated and maintained correctly to keep appropriate legal separation between you and the LLC.
Also, in addition to maintaining proper compliance you may not want to be the only member (owner) if reasonably possible. It takes unanimous written approval by all members to change the ownership. If you are successfully sued and the creditor wants your ownership the other owner(s) could refuse to agree, thereby, blocking the takeover.
One caveat is that you really need to know you can trust those with whom you partner, should you choose to do so. If you are offloading personal assets to protect them in an LLC, you must be mindful that should you choose to have partners in the LLC that you are no longer the sole owner of the LLC that owns those assets—the LLC is owned by the partnership.
If you’re thinking, “How can I best protect my assets with an LLC?”, then speaking to an asset protection specialist may be helpful. Asset protection planning is legal and will help you spread out your assets in case you find yourself in trouble with debt or litigation. This does not mean you are hiding your assets. In fact, they are quite in the open but legally protected.
There are exceptions to the protection of assets that an LLC provides. If you personally guarantee a loan on which your LCC then defaults, you are responsible. If the assets in the LLC are used as loan collateral and loan payments are not made the asset can be taken. If you fail to deposit taxes withheld from your employees or do something fraudulent, reckless, or illegal—on purpose—that hurts the LLC or someone else, you can be sued.
Asset protection in an LLC, done correctly and properly maintained, is a good way to protect your financial future.