Can I protect my personal assets from business liabilities?

April 2, 2018 - Posted by: admin - In category:

taxes - No Responses

Yes.  LLCs and Corporations were invented for this very purpose.  

An accountant reading this post would be quick to point out that there are often important tax considerations involved in the choice between such legal entities.  Even so, I the genesis of corporations, partnerships, limited partnerships, limited liability companies and all variations of the same was because of asset protection.  In other words, corporations and the like came into existence, first and foremost as a means of dividing business ownership and assets from personal assets, with the intent that if something went wrong on the business side of the ledger, the personal assets of the business owner(s) could remain safe, secure and untouched by such business claims.

So, does use of a corporation, LLC, LP, LLP or similar legal entity automatically result in total asset protection for personal/non-business property without any other actions or efforts?  Unfortunately, it is not quite that simple.  But it is a good start.  In stark contrast, a business owner who operates a business via a sole through his/her personal name has almost no asset protection whatsoever.  The concept is that if there is no attempt to divide business and personal assets/dealing/accounting/funds, then when there are business liabilities or claims, personal assets could be at risk to pay such claims.

On the other hand, if the business is operated by and through an LLC, with the LLC owning all business assets, having one or more separate bank accounts, filing tax returns in accordance with such separation and otherwise acting like a real business in all other respects, then if there are business liabilities or claims, such separation should be respected and preserved.  The outcome in this much happier situation will most often be that personal assets of the business owner(s) will be preserved and protected from business liabilities.

Conceptually, none of that is difficult to understand.  Practically, instituting and maintaining such separation over time is not just takes a measure of effort and care.  Given what could be at stake in a worst-case situation, such effort and care is a small price to pay (and a very wise investment).  I am happy to report that during the course of my legal career, I have witnessed an increased proportion of small business owners who have come to understand and apply these principles.  Perhaps this is one of the benefits of the internet age.  Sure, I still come across the occasional business owner that uses the company checkbook to pay the home mortgage and buy groceries and otherwise operates with no separation between business and personal finances.  But this happens less frequently in recent years.

To summarize, protection of personal assets from business liabilities can be achieved in part through the proper use of an LLC, corporation, LP or other legal entity.  Following the “corporation formalities” consistently over time will provide the highest level of legal liability protection for the personal property of the business owner.  

 

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