Why are LLCs such Good Entities for Asset Protection?

[meganh]

It's a popular question, and one I answer probably a dozen times each week. Why are LLCs better than corporations when it comes to protecting your assets?

On the face of it, LLCs and corporations protect you, as owners, the same way. If someone sues your LLC or your corporation, they generally can't break through the entity and attack you personally, or try to take your personal assets. This barrier is called the corporate veil and, while it can be broken in certain circumstances, generally it will protect you from a creditor of the business structure.

But going the other way, things differ - a lot. If someone is suing you personally, and trying to get at your business, or at its assets, you are far better off to be running with an LLC than with a corporation.

The reason is found in state laws, and specifically in creditor protections. In almost every state, the law says that your shares in a corporation are considered to be an unprotected asset. That means if you can't pay a judgment against you, and your assets are being seized and sold off to pay your debt, your shares may be part of that round-up. If someone gets control of your shares, they instantly have control over how those shares are voted. So, if you are the 100% owner of a corporation, or even simply a majority owner, someone else now has control. And that someone can vote to close the company, sell the assets, etc.

But LLCs are treated differently. Most states say that your ownership in an LLC can't be taken away from you and sold. Instead, a creditor only has the right to file something called a Charging Order over your ownership. The Charging Order diverts all profit (or loss) that would otherwise come to you personally, over to your creditor. Some states, like Nevada, go further and state that this is the only way a creditor can attack your LLC. Others allow creditors to make a second application to foreclose on the Charging Order (which has the same effect as transferring ownership of the LLC), if the debt still remains unpaid after a certain period of time has passed.

And remember, your LLC can make any kind of tax election it wants. If it suits your business needs to be taxed as a C or S corporation, you can make that election with the IRS. Now your LLC looks like a C or S corporation for tax purposes, but is still an LLC when it comes to asset protection.

Given the one-two punch of asset protection and tax savings, an LLC is definitely my recommended choice for business owners today.

[Diane Kennedy]

And to make a good thing better - add in a Trust Sandwich and/or a Series LLC.

Take a look at the blog post on 2/3/2010 to read more about the Series LLC.

And maybe we can talk Megan into doing a post on the Trust Sandwich.

[chambers]

Does the sandwich answer this comment someone left on your book on amazon? I don't have much assets to protect, but I'm hoping to in the future.

This review is from: Loopholes of the Rich: How the Rich Legally Make More Money and Pay Less Tax (Paperback)
This book had a lot of good information but I have to strongly disagree with the idea of putting a persons home into a Limited Liability Company. It sounds great but the IRS has made it clear that they will not find a busines purpose for puting a home in an LLC. Also there are court decisions around the countyr that have found that putting ones home in an LLC does not protect the home from legitamate creditors. LLC are fantastic entities for asset protection, income tax planning, and estate and gift tax planning, in our practice we work them daily, but we never put personal homes into the LLC it is a waste of time and money.

Marty Burbank, Juris Doctor, Masters of Law in Tax

[Megan Hughes]

Hi again, chambers

I think it all depends on the situation. The IRS does allow us to put our personal homes into an LLC, as long as it is a disregarded LLC for tax purposes. That allows you to keep your existing tax breaks - mortgage interest deduction, for example - and does give you some asset protection. The poster mentioned legitimate creditors being able to pierce an LLC -- and that can be correct. Putting your home into an LLC won't save it from foreclosure, for example, if you don't pay the loan. A creditor with a secured claim against your house is coming through. The same goes if you were to use your home as collateral to secure a debt to someone else. But it will give you some protection against the guy who trips over a crack in the sidewalk outside your house and tries to sue you for the heck of it.