If you are establishing a business, it is important to choose the right structure from the outset. There is inherent risk involved with regard to liability issues that can arise in the future. Asset protection is a must for small business people, and we can help you understand your options so you can make informed decisions.
Limited Liability Companies
A limited liability company is a business structuring tool that is very widely utilized. Generally speaking, if you establish an LLC, your own personal resources would be protected from the actions of the company and its employees. Conversely, if you are personally sued, assets that are the property of the limited liability company would be protected.You can certainly take this approach to asset protection as a precaution, but reactionary transfers are not permissible.
If you find out that you are going to face a legal action, and you convey assets into an LLC as a response, this would be viewed as an illegal fraudulent conveyance.In addition to the asset protection benefits, limited liability companies are flow-through entities from an income tax perspective. The profits and losses from the business would be claimed on your personal income tax forms. As a result, you get the simplicity that goes along with a sole proprietorship without the risk.
Family Limited Partnerships
Another asset protection device that can be the right choice for some people is the family limited partnership. As the name would imply, everyone that is participating in the partnership must be in the same family. If you were to create and fund an FLP, you would be the general partner, and the other members would be limited partners.You do not have to worry about surrendering control of the decision-making to a democratic process.
Since you are the general partner, you have sole authority when it comes to actions that are taken by the family limited partnership.The best way to explain the value of a family limited partnership is through the utilization of a simple example. Let’s assume that you are a real estate investor, and you own two apartment buildings. You are concerned about the possibility of someone filing a lawsuit after getting injured on one of your investment properties.Under these circumstances, you could convey each property into a separate family limited partnership.
If someone is injured in one of the apartment buildings, and they file a lawsuit, the other one would be protected. The personal assets of all members of the partnerships would also be out of the reach of the litigant.One could take additional steps to protect assets by holding limited equity in the buildings. Plus, if any member is personally sued, the assets that are held by the family limited partnerships could not be attached.
Business Succession Planning
Asset protection is one major consideration that you must address when you are putting your business on the map. After you become successful, you have to start to think about succession from an estate planning perspective.One simple but effective strategy for succession planning is the utilization of a buy-sell agreement. With the entity purchase plan, the business would take out insurance policies on all of the owners.
The value of the policies would be equal to a business share. After the passing of one of the co-owners, the business would use the insurance policy proceeds to purchase the share that was owned by the deceased partner from his or her family. This is one type of buy-sell agreement, but there are a handful of others that work in a similar manner.
Family Businesses & Estate Taxes
If you are running a family business, and you will be passing it along to the next generation, estate taxes can be a factor. There is a federal estate tax to contend with, and here in Illinois where we practice law, there is a state level estate tax. In some cases, business property and equipment can be extremely valuable even if the income that is generated is not in the upper stratosphere. Fortunately, if estate taxes are looming, there are strategies that can be implemented to mitigate your exposure.
Contact Garofalo Law Group!
We are here to help if you would like to discuss asset protection and business planning with a licensed attorney. Contact us for a free consultation or give us a call at 312-753-6000.