By: Michael Scott Ioane
There are many entities and strategies being bandied about as the best and foolproof way to protect your assets. First of all, there is no such thing as a foolproof asset protection plan. Second, the “best” for one person’s needs may not always be applicable to another’s requirements.
There are many businesses entities that could be formed for this purpose. A corporation may not be the best solution. It may be liable for taxes, its structure is too formal for convenient management, it does not allow a single member to dominate the entire entity, and it is not protected from losing its assets or being taken over when a member is sued and has lost.
Trusts are useful only when someone else controls it. This automatically creates a risky situation as there have been a number of trustees who have ran away with all the trust’s assets. Trusts are not flexible and run a greater risk of being declared fraudulent. A trust benefits somebody else, not the owner of the assets.
A Limited Partnership, one formed by family members (a Family Limited Partnership) may be useful but it also has several limitations. It must have more than one member, it is required to submit a K-1065 return and thus suffers from decreased privacy, and not all of its members enjoy liability protection.
What then, is the business entity best suited for asset protection purposes? It is called a Limited Liability Company or LLC. It is asset protection’s best friend. True, it may not always be the best solution but it very usually is and can rarely be beat for most circumstances.
An LLC is a Charging Order Protected Entity (COPE). That means that the LLC and its members are considered as separate entities. As they are separate, their assets are also considered separate. A lawsuit won against an LLC member exposes only that member’s part of the profits made off the LLC’s assets. Take note that only profits or distributions from the assets are the items at risk, not the LLC’s assets themselves. Moreover, the other members’ shares enjoy protection. Unless all the members unanimously allow it to be so, an LLC cannot be taken over by an outsider.
An LLC is better than a company as it allows single membership, is less formal and is usually not liable for taxes. It is better than a trust as it allows control by the one person who also benefits from the entity. It is better than a Family Limited Partnership as it usually does not need to file any return. It also provides liability protection to all its members.
An LLC has many more benefits and functions that deserve its own chapter. In fact, “Asset Protection” by Michael S. Ioane has an entire chapter devoted to explaining the particulars of LLCs for those who seek the best means of asset protection.
Should you form an LLC or should you use other entities? Read the chapter to help you figure it all out.
Michael Scott Ioane