If you own a small business as a sole proprietor, you are putting yourself at risk. Yes, it may seem like the simplest solution, but there is no separation between your business and your personal assets.
Your personal property can potentially be attached by creditors and other types of litigants. When you utilize an asset protection structure as an alternative, you can go forward with the knowledge that your property will be protected under most circumstances.
Family Limited Partnership
A family limited partnership (FLP) is one of the most commonly used asset protection structures. You would be the general partner if you establish a partnership, and you would have all the decision-making authority.
Members your family that you bring into the partnership would be limited partners with no ability to make decisions.
We will use a hypothetical situation to explain the benefits.
Let’s say that you own a construction company, and you also purchase and remodel homes that you rent for additional income. You are concerned about potential lawsuits, so you convey your construction company and each home into a separate family limited partnership.
If someone is injured in one of the homes and they file a personal injury suit, they would be suing the family limited partnership that owns that particular piece of property. All the rest of your property would be protected, including your personal property and that of the limited partners.
The asset protection also works in the other direction. All of these properties would be protected if you or any partner is personally suited.
In addition to the asset protection benefit, family limited partnerships are used by people that have estate tax exposure to facilitate transfers at a tax discount. This tax is applicable on the portion of an estate that exceeds the exclusion.
Most people do not have to pay the tax because the exclusion is $11.7 million this year. There are 12 states that have state-level estate taxes, and the exclusions are lower, but California does not have its own estate tax.
Limited Liability Company
Another structure that can be used to protect assets is the limited liability company (LLC). If you make your business a limited liability company, generally speaking, your personal property would be protected if a lawsuit is filed against the company.
There is an exception to the rule. If your actions directly injure someone while you are in the process of performing your duties at work, a suit could be filed against you individually.
The business and its property would be protected if you are personally sued unless a charging order has been issued by the court. This would allow a litigant to attach assets that are distributed to you by the limited liability company.
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