Running and operating a business can pose a great deal of risk.  It is important to keep in mind some of the common risks when running a business.  Some examples of common risks include various third party obligations a business owner has, including business-related debts and mortgages on business property, employee mistakes, and other various consumer-related complaints that result in a lawsuit.  So, how does one protect their business’s assets and property from seizure due to a lawsuit against the business?  The risk is minimized by utilizing several key types of asset protection planning.

One of the first steps is to look at how the business is organized.  Has it been incorporated or setup as an LLC to prevent a business owner from being personally liable for the business’s debts, obligations, and lawsuits?  LLC stands for Limited Liability Company. The ability to formulate an LLC is established through state statute.  By formulating an LLC you are creating a business organization that that limits your liability for your LLC’s debts and dealings, much like the protections larger corporations are afforded.   Related to establishing an LLC is the idea of “incorporating” your business.  A Corporation is a legal entity which is designed to separate a business owner from the liabilities of their business. These two key ways of organizing a business can assist in minimizing an individual’s personal risk in doing business.

Another asset protection tool is the utilization of a trust.   An Asset Protection Trust is a legally acceptable method for protecting important and substantial assets.  An Asset Protection Trust can protect your most important assets from creditors and other situations, such as divorce, where large portions of your assets can be seized. An Asset Protection Trust is established as an irrevocable trust so that the trust now owns those assets, not the Trustmaker. An Asset Protection Trust can be established domestically, or can be established in a foreign territory that has specific laws designed to protect assets.

Another tool for protecting a business owner’s assets is a Family Limited Partnership.  Under a Family Limited Partnership, those establishing the partnership would transfer the business to the Family Limited Partnership. Those that established the Family Limited Partnership would retain control of the partnership. Overtime they would begin to transfer limited interest to family members of their choosing. This would allow those family members to begin learning how to take over the family business while limiting their potential liability. In doing this, one of the primary benefits of transferring assets to your descendants in this manner is it helps minimize potential estate taxes through reducing the size of your estate and possibly by claiming discounts on the business valuation for lack of control and lack of marketability.

As a business owner, it is important to have proper planning in place for potential risks that could become a reality.  Lawsuits could have a devastating affect on a business if an owner failed to properly protect their business and personal assets.

For additional reading:

The Spirit of Entrepreneurship

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