LLC Asset Protection: Forming a Company to Protect Your Property
Our Lawyers Help Clients Use Limited Liability Companies (LLCs) to Protect Their Personal Assets
The more assets you acquire, the more you have to lose. Deploying an appropriate asset protection strategy helps ensure that your assets will remain yours—and that you won’t be at risk of losing everything in the event that something unexpectedly goes wrong. One strategy we use for our clients is establishing limited liability companies (LLCs) for asset protection purposes.
An LLC is a type of business entity, similar to a partnership or corporation. However, LLCs offer unique benefits that make them particularly well-suited to asset protection. Limited liability companies are both relatively easy to form and relatively easy to manage; and, if formed and managed properly, they can provide strong asset protection under a wide range of scenarios.
Understanding the LLC Entity
The simplicity and strength of asset protection afforded by LLCs make these entities highly-effective tools for shielding personal assets from litigation. However, the specific benefits of forming an LLC vary from state to state. This is why you will see many asset protection LLCs formed under Delaware, Nevada, or Wyoming law. These states (among others) are particularly LLC-friendly, and forming an LLC under one of these states’ laws can afford additional benefits.
Broadly, however, the benefits of forming an LLC are consistent across state lines. Some of the main benefits of forming an LLC include:
- Ease of Formation – Compared to C corporations and S corporations, LLCs are relatively easy to form. This ease of formation mitigates the risk of mistakes that can prevent owners from obtaining the asset protection benefits they desire.
- Ease of Management – LLCs are also relatively easy to manage. Failure to properly manage an LLC can result in loss of liability protection, so this ease of management is a key feature as well.
- Flexibility of Ownership and Control – LLCs offer substantial flexibility for establishing ownership and control rights. While many LLCs formed strictly for asset protection purposes are owned and controlled by a single individual, it is also possible to form an LLC with multiple owners—all of whom have specific rights and responsibilities.
- Pass–Through Taxation – LLCs are not taxed at the entity level (unless the owner(s) elect for corporate-style taxation). This avoids additional complications when filing your annual tax returns, and it also helps mitigate the risk of mistakes that could lead to liability exposure.
- Limited Liability – Finally, and most importantly for asset protection purposes, a duly formed and managed LLC provides liability protection for the LLC’s owners. In the event of a lawsuit arising out of the LLC’s operations, only the LLC’s assets will be at risk. As an owner, your assets are not at risk, even if the LLC’s assets are insufficient to satisfy any judgments awarded against the company.
While the limited liability nature of LLCs protects owners’ personal assets in most circumstances, there are some exceptions. As a result, while forming an LLC is a key step for protecting individuals’ assets in many cases, it will usually just be one component of a broader asset protection strategy. At Oberheiden P.C., our lawyers can determine what steps are necessary to protect your assets, and then we can put together a comprehensive strategy that uses LLCs and other tools to minimize your risk of loss.
When to Use an LLC for Asset Protection
So, when should you use an LLC for asset protection? Limited liability companies are effective asset protection tools under a wide range of circumstances. At a high level, some of the circumstances in which our lawyers may recommend forming an LLC for asset protection purposes include:
- Starting a Business – If you are starting a new business venture, then forming an LLC before you open for business will help ensure that your personal assets are protected from day one. You will operate your business through your LLC, and any business-related liabilities will become the LLC’s financial responsibility rather than falling to you personally. If you are already operating a business and have not yet formed a business entity, forming an LLC promptly will be essential for mitigating your personal risk.
- Buying a Business – If you are buying an existing business through an asset purchase agreement (APA), then you will need to form a new entity to own the business and take on financial responsibility for its liabilities. The LLC is a good choice from an asset protection perspective; and, as discussed above, forming an LLC to own your newly-acquired business can afford several other benefits as well.
- Investing in Real Estate – When investing in real estate, forming an LLC to own and manage the property can be essential for protecting your personal assets. In the event of a premises liability claim, renter lawsuit, or loan default, having the property owned by an LLC helps ensure that only the property and any other LLC assets are at risk—while all of your personal assets remain secure.
While an LLC is a separate entity from its owner(s), an LLC must have a specific business or investment-related purpose in order to serve as a valid asset protection tool. Simply forming an LLC as an “alter ego” to manage your personal finances generally will not result in separate treatment—and even using a business LLC’s funds to cover personal expenses can result in “piercing” of the limited liability veil. If you do not have a reason to form an LLC, then forming an asset protection trust or using other asset protection strategies will likely be a more suitable approach to shielding your personal assets from potential liabilities.
Maximizing the Asset Protection Benefits of Your LLC
To maximize the asset protection benefits of your LLC, you will need to manage your LLC appropriately; and, as discussed above, you will most likely want to combine your LLC with other asset protection tools. Our lawyers can help you address all pertinent considerations. We can prepare, file, and store all necessary documentation on your behalf, and we can help you make informed decisions about your overall asset protection strategy.
Some examples of the steps individuals can take to maximize the asset protection benefits of their LLCs include:
- Keeping Personal Assets and LLC Assets Separate – An LLC is a separate legal entity from its owner(s), and respecting this separation is critical for asset protection purposes. Among other things, this means that owners should keep their assets separate from the assets of the LLC.
- Respecting the LLC Formalities – Ignoring the formalities of owning an LLC can also result in loss of limited liability. As a result, owners need to continue to work with their counsel post-formation to ensure that they have all of the requisite documentation in place.
- Owning the LLC Through a Trust – Combining an LLC with a trust can create multiple layers of protection from personal liability. For many high-net-worth individuals, this combination will be essential for effective asset protection.
Again, these are just examples. When you choose Oberheiden P.C. for asset protection, our lawyers will walk you through everything you need to know in order to get the maximum protection from your LLC. We will assist you with implementing all other necessary asset protection tools as well, and we will continue to guide you as your assets continue to grow and your risks continue to evolve.
FAQs: Using an LLC for Asset Protection
Do LLCs provide complete asset protection?
No single tool can provide complete protection for your personal assets. But, for business owners and investors, an LLC can be a key component of a broader asset protection strategy. Limited liability companies can provide strong asset protection, and they offer a variety of other benefits as well.
How does forming an LLC provide asset protection benefits?
Forming an LLC protects the owners’ personal assets because the LLC is treated as a separate legal entity from its owners. This means that if the LLC gets sued, only the LLC’s assets are at risk in most cases.
How can you lose the asset protection benefits of an LLC?
Several mistakes can result in loss of the asset protection benefits afforded by forming an LLC. One of the most common mistakes people make is failing to treat the LLC as a separate entity. Commingling funds, using LLC assets for personal purposes, and other similar types of mistakes can all put LLC owners’ personal assets at risk.
Where should I form an LLC for asset protection purposes?
The best state to form an LLC for asset protection purposes depends on your individual circumstances. While Delaware, Nevada, and Wyoming are popular choices, it is important to work with a law firm that is capable of evaluating all of your options.
When should I form an LLC for asset protection?
If you have assets that you want to protect, you should talk to a lawyer about forming an LLC. Even if an LLC isn’t the right vehicle for your asset protection needs, your lawyer can walk you through your other options and put an effective strategy in place.
Speak with a Senior Asset Protection Lawyer at Oberheiden P.C.
If you would like to speak with a lawyer about forming an LLC for asset protection purposes, we invite you to get in touch. Please call 888-680-1745 or contact us online to schedule an appointment at Oberheiden P.C.