Asset Protection (“AP”) is the science of making your assets less attractive and less available to creditors and creditors' attorneys.
The goals of AP are:
- We want to settle a claim or lawsuit for as little as possible, and
- If we are lucky, we want to both avoid the lawsuit and have the claim go away without paying a thing.
FACT – Creditor actions almost always settle before going to the judge or jury.
How much monetary claims and actions settle for depends upon the balancing of the strengths and weaknesses of each sides argument –
- The less attractive and less available we make the assets, the more weight you will have in this balancing act.
LLCs are Asset Protection –
- LLCs are AP because they always make assets less attractive and less available to creditors –
- How less attractive and how less available depends on how the LLC is organized and operated.
- Recently, California courts have set aside the charging order protection that an LLC normally offers if it is a single member LLC. Always have a multi-member LLC in California.
LLCs – Always a Layer of Protection
When LLCs own valuable assets, it puts a layer of protection between the assets and personal claims against you.
Conversely, when LLCs own potentially dangerous (“hot”) assets (think “rental properties”), it puts a layer of protection between you and claims arising from the “hot” assets.
When you use multiple LLCs to own multiple “hot” assets, it protects you and it also helps protect the “hot” assets (say, 3 rentals and 3 LLCs) from each other’s liabilities.
When LLCs own a business, it puts a layer of protection between you and your business debts and liabilities.
LLCs are used to break businesses into sections and gain layers of protection between the sections – business vehicles, business office building, business equipment, business debts, etc.
LLCs are used to own your share in a partnership or a multi-member LLC – putting a layer of protection between you personally and the debts, liabilities and obligations of the entity.
LLC Advantage over Sole Proprietorships
Sole Proprietorship (“SP”) owners have unlimited personal liability for all business activities, debts, obligations, and liabilities (including the acts of SP employees and sometimes SP contractors). LLCs provide good arguments to limit exposure for these things to the assets and insurance of the LLC and away from your other assets.
Sole Proprietorship income to owner is subject to the 15.3% self-employment tax – which comes off the top. LLCs can offer Sub S (SCorp) tax relief.
Sole Proprietorships terminate at the owner’s death; presenting transfer obstacles to continuing the business. An LLC is a separate and distinct legal entity from its owner and can live beyond the owner.
LLC Advantage over Corporations and Advantage When Used as a Partner
For an owner of a Corporation to receive “limited liability” protection the owner must follow statutory corporate formalities or be subject to piercing (e.g. corporate protection is set aside by a court). LLCs do not have to follow statutory “formalities” to provide limited liability.
Creditors of a corporation can seize the owner’s entire corporate ownership interest (the stock).
The LLC limits a creditor’s reach to just the LLC’s distributions – and not to LLC management – this is leverage for settlement.
LLC Tax Advantage
You can choose to be taxed as a sole proprietorship, or You can elect “Sub S” tax status – allows you to limit the 15.3% self-employment tax as much as you want or dare.
How Does LLCs Asset Protection Work?
Think of an LLC as a “Box”; A Box that keeps claims that arise from assets inside the Box, inside, and a Box that keeps claims that originate outside the Box, outside.
The Key to LLC Asset Protection is the Operating Agreement
The first thing a creditor’s attorney looks at is your Operating Agreement to see if they can pierce the LLC (set it aside). And they often can, especially if you used an online service to set it up.
Our Operating Agreement was drafted by an experienced creditor’s attorney who switched to the other side! Our provisions will assure that a creditor’s attorney will be discouraged.
We Tie LLC Provisions to Your Living Trust
First, understand that your Living Trust will be a member (to avoid probate).
Second, key provisions in both your Living Trust and the LLC Operating Agreement deal with the transfer of power upon cognitive incapacity and death – as Living Trust provisions do so with considerably more detail – we take advantage of that planning and tie the LLC to the Living Trust.
“Manager” or “Member” Managed LLC?
We want “Manager” managed for asset protection and other reasons. That means you would be the manager but not a member (owner), your Living Trust is.
A Manager managed LLC adds another layer of sophistication. It provides more “separateness.”
The Manager managed structure works perfectly for having your Living Trust as the primray owner of the LLC and you be Manager of the LLC.