It can be challenging to get a small business up and running, and some people take the plunge without prioritizing asset protection. Everyone knows that legal actions are possible, but the implementation of a protection structure can be put on the back burner.
While it is true that you may never be the target of a lawsuit, it sure is nice when you have a plan in place if something unexpected happens. It is relatively simple to create an asset protection structure, so there is no reason to procrastinate.
Of course, there are those that know that they should prioritize asset protection from the start, and there are two structures that are most commonly utilized.
Family Limited Partnership
A family limited partnership (FLP) is a structure that can be the perfect choice for some people. As the name would indicate, the members of the partnership would be in the same family, and there is a general partner and limited partners.
The general partner is the sole decision-maker, and you would assume that role if you create and fund the partnership. Family members that you bring into the fold would be limited partners.
Real-Life Scenario
Let’s say that you are a successful restaurant owner, and you are also a real estate investor. You own five rental units, and you are the type of person that is going to be viewed as a “deep pockets target.” As a result, you have a good reason to be concerned about potential lawsuits.
Someone could be injured in one of your rental properties or the restaurant, so asset protection is a priority. As a response, you could convey each of the five rental units into separate family limited partnerships, and the restaurant could be in another one.
If a plaintiff files a lawsuit because they are injured in one of the buildings, all the rest of the property would be protected because they would only be able to sue the owner of that particular building. The personal property that is owned by each member of the partnership would be protected as well.
On the other side of the coin, if one member of the partnership is sued, the property that is held by the partnerships would be out of the reach of the plaintiff.
There is a federal estate tax with $13.61 million exclusion in 2024. This is the amount that can be transferred before the tax would be applicable on the remainder.
People that are exposed to the tax have to implement estate tax efficiency strategies, and there are ways that a family limited partnership can be used to mitigate the impact of this tax.
Limited Liability Company
Another widely used asset protection structure is the limited liability company (LLC). When you establish a limited liability company, you are creating a wall of separation between your personal property and your business.
If creditors file a lawsuit to collect unpaid debts from the business, your personal property would be safely nestled out of the reach of the litigant. Of course, if you personally guarantee a loan that is used for business reasons, you are on the hook.
There is an exception to the rule with regard to the security of your personal assets. They would be in play if you directly and personally injure another person while you are at work.
The asset protection is a two-way street when you have a limited liability company. Your business would be protected if someone sues you personally in most instances.
However, if the court issues a charging order, any distributions from the LLC to you as an individual could be attached.
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