Choice of Corporate Structure
Choice of Corporate Structure From an Asset Protection Point of View
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What is “personal” asset protection?
Taking steps to protect “all” valuable assets from creditors.
What assets should be protected? The major ones are:
- Personal residence (which is the most difficult asset to protect)
- Brokerage accounts
- Vacation properties
- Business interests (such as S- or C-Corporation stock or a Limited Liability Company)
What can the creditor go after?
All the business owner’s assets which include S- or C-Corporation stock.
How did the S- or C-Corporation work from a personal asset protection point of view? Not well.
What about an LLC? If the LLC is set up properly, using the same car crash example, the creditor is NOT going to be able to go after the business owner’s interest in the LLC.
What makes LLCs so special when it comes to personal asset protection? It’s the remedy a court can fashion when a creditor tries to go after the asset.
With an S- or C-Corporation, the creditor could ask the judge to force a sale of stock to satisfy the judgment or force profits of the corporation to go to the creditor.
With a properly setup LLC, a judge will only be able to give the creditor what is known as a “Charging Order” which essentially gives the creditor nothing but the ability to sit around and wait for a distribution that may never come. The business can continue as normal and pay the business owner a salary, fund his/her pension, etc.