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)

    Why do people need “personal” asset protection?

    To protect from negligence lawsuits such as your garden variety car accident.

    You may have heard the statistic that texting and driving is more dangerous than drinking and driving? Even so, millions of Americans text and drive multiple times a day. There are few people you’ll run into who, if they are being truthful, won’t admit to that oh my gosh moment where they look up from texting only to see a bike rider they almost ran over or the fact they swerved into oncoming traffic or even just ran a red light or a stop sign.

    Two entities that should never be used to run a business (they aren’t even entities). They are sole proprietorships and true partnerships. Neither provides personal asset protection or limited liability from business activities.

    What about the Asset Protection features of S- and C-Corporations.

    Both entities protect a business owner’s personal assets from the liability of the business itself. For example, if the business put out a defective product that caused harm, the business owner’s personal brokerage account or vacation property would not be at risk.

    The exception to this is piercing the corporate veil which is rare and outside the scope of this article.

    But what if the business owner is driving to dinner, texts someone while on his/her phone, causes a car crash, and is sued for negligent driving?

    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.

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