Estate planning lawyers help people facilitate postmortem asset transfers, but there is another element that can be overlooked. You should do everything possible to preserve your legacy for the benefit of your loved ones, and asset protection is part of this equation if you are a business owner.
Potential Legal Actions
If you are doing business as a sole proprietor, there is no legal separation between your business and your personal property. A litigant who files an action against your business could potentially reach your personal property.
This is a risk that you do not have to take because you can implement an asset protection strategy.
Limited Liability Company (LLC)
One business structure that is commonly used by small businesspeople who want to protect their assets is the limited liability company. If you establish an LLC, you will not be held personally liable for your business debts or the actions of employees or co-owners.
This is true if you did not personally guarantee the loans. In some cases, lenders and financial institutions will require personal guarantees because they do not want to be left high and dry.
There is an exception to the rule concerning personal liability. If someone is injured as a direct result of your personal negligence while you are doing your job, you could be liable.
Employers are required to deposit taxes that are withheld from their employees’ wages. If you fail to do this and you are sued, the limited liability company will not protect you.
Another exception to the rule would be an act of fraud or some type of reckless behavior that does harm to another entity, including an LLC that you co-own.
If you are personally sued for actions that are not related to the limited liability company, for the most part, the LLC and its property would be protected. However, there is an exception in the form of a charging order.
A court can rule that a creditor must receive payments from the LLC that you would have received. It is also possible for a creditor to foreclose on the ownership interest that is held by an LLC owner.
Family Limited Partnership
Another asset protection structure that can be used by small businesspeople, professionals, and real estate investors is the family limited partnership (FLP). If you establish a family limited partnership, you would be the general partner.
You would add family members that would become limited partners. The general partner has the total decision-making authority, and the other partners are essentially silent partners.
In a broad sense, the asset protection dynamic is similar to the limited liability company. For example, if you own a restaurant with your children, you can convey it into a family limited partnership.
If someone files a lawsuit against the restaurant, they would be suing the family limited partnership that owns that business. The personal property that is owned by all the partners would be protected.
You are not limited to the utilization of one family limited partnership. Let’s say that you own an apartment building and a restaurant. They can each be held by a separate partnership, and the restaurant would be protected if someone sues the owner of the apartment building.
Conversely, the restaurant and the apartment building would be protected if a lawsuit is filed against any of the partners. A family limited partnership can also be an efficient estate planning tool to transfer ownership interests to members of your family.
There can be income tax advantages because the partners claim income and losses on their personal income tax returns. As a result, the income that is generated by the business is broken up into smaller chunks for tax purposes.
People that are exposed to the federal estate can also gain tax benefits through the utilization of a family limited partnership.
We Are Here to Help
If you are a small business owner or not, we can help you create a plan that is ideal for you and your family. To get started, call our Warren, NJ estate planning office at 908-222-8803 or send us a message through our contact page.
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