If you are the owner of a small business, you may start out as a sole proprietor while you are trying to find your footing. It takes a lot of focus and hard work to get a new business off the ground, so you may not think about some of the finer details.
This is understandable, but at some point, you should start to prioritize asset protection. There is no separation between your personal property and the actions of your business presence if you are a sole proprietor, so you are at risk if you are the subject of a lawsuit.
Fortunately, there are relatively simple steps that you can take to keep your resources out of harm’s way.
Limited Liability Company
The limited liability company or LLC is the most commonly used asset protection structure for small businesses. If you establish a limited liability company, your personal property would be out of reach if you are sued by creditors and most other litigants.
There is an exception made if you are personally responsible for damages that you directly caused while you were doing your job.
When you have a limited liability company, the asset protection is a two way street. If the business is sued for some reason, your personal property would be protected unless a charging order is issued by the court.
Under those circumstances, payments from the LLC that are due to you could be attached.
One of the reasons why people feel comfortable with sole proprietorships is related to taxation. You claim your profits and losses on your regular income tax returns, so there is no added layer of complexity.
This is called “pass-through taxation,” and you do not lose it if you have a limited liability company, so this should not be a source of concern.
Family Limited Partnership
Another asset protection tool that can be the right choice for some professionals, investors, and business owners is the family limited partnership (FLP). If you establish this type of partnership, you would be the general partner, and you would be the sole decision-maker.
You would distribute ownership interests to members of your family that would be limited silent partners.
To explain through the use of an example, we will say that you own three apartment buildings. You know that an injured party could potentially file a lawsuit if an accident takes place on one of your properties.
As a response, you could convey each apartment building into a separate family limited partnership. If someone slips and falls in an apartment building, and they claim that the ownership is at fault, they would be suing the family limited partnership that holds that apartment building only.
The other two apartment buildings would be protected, and personal property that belongs to each respective partner would be out of the reach of the plaintiff. Conversely, if a partner is sued, the property that has been conveyed into the partnerships would be protected.
You enjoy pass-through taxation when you have a family limited partnership, and an FLP can be used to gain estate tax efficiency if this is a source of concern for you.
Attend a Free Webinar
If you want to learn more about estate planning, we have some great opportunities for you in the near future. We are conducting webinars that cover some very interesting and important topics, and they are free of charge.
You can learn a lot if you join us, and you can see the dates and obtain registration information if you visit our webinar schedule page.
Schedule a Consultation Right Now!
If you are ready to work with a Hilton Head, SC estate planning lawyer to put a plan in place, we would be glad to help. You can set up a consultation appointment if you call us at 843-815-8580, and you can use our contact form to send us a message.
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