If you are a small business owner, you have to be concerned about asset protection. There are two structures that are very commonly utilized, and we will look at them here.
Limited Liability Company
One of the these asset protection structures is the limited liability company (LLC). If you establish your business as a limited liability company, generally speaking, your personal assets would be protected from entities that are trying to collect debts from the business.
The protections are solid, but they are not absolute. For example, if you personally and directly injure someone, you could be held liable. If you guarantee a loan that you have taken out on behalf of the business, your personal property would be in play if you default.
Another advantage that is gained through the utilization of a limited liability company is the pass-through taxation. You can claim business profits or losses on your personal income tax returns, and this streamlines your accounting.
Family Limited Partnership
Another business structure that can be the right choice for some people is the family limited partnership (FLP). As the name would imply, the people that comprise the partnership must be members of the same family.
If you establish an FLP, you would be the general partner, and the family members that you add would be limited partners. As the general partner, you would have sole decision-making authority.
A good way to explain the way it works is to share a simple, stripped-down hypothetical scenario. Let’s say that you own two shopping centers that generate a good bit of income. There is a lot of activity each day, so it is very possible that someone could get injured on your property.
Asset protection would be a very important consideration, so you could convey each of the shopping centers into a different family limited partnership. If someone files a personal injury lawsuit because they were injured in one of the centers, the other one would be protected.
Your own personal assets would also be protected from the litigant seeking redress. On the other side of the coin, if you or any other partner is personally sued, the shopping centers would be protected.
It should be noted that family limited partnerships can have value for people that are exposed to the estate tax. The exclusion is $11.58 million, so most families do not have to worry about it, but it is a major factor for those that do, because it carries a 40 percent top rate.
Members of such a partnership can transfer assets among one another at a tax discount, and this can be advantageous if you are exposed to the federal estate tax.
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