Asset protection in business is challenging. Our son called us yesterday and wanted to discuss how he should structure a business for an apartment building he is thinking of buying. He described his business plan and then wanted to discuss which type of entity he should use. He mentioned that he thought of layering using an LLC (Limited Liability Company) with an S Corp for the partner. At that point we explained to him that he wanted to structure using the LLC for both layers. When he asked why, we had to explain.
Asset protection is a double swinging door. Many people tend to plan their asset protection from only the business side, to protect their personal assets if their business fails. This is a mistake. Of course it works just fine when your business gets in trouble. It blocks creditors coming through the door after you and your home and savings account and other personal assets. But what about when you get in trouble personally? Say you are in an accident or suffer an illness and you can’t pay your bills.
When starting a business, everyone wants to structure it for asset protection. They want to protect, their house, summer cabin, bank accounts and retirement nest egg. But if they thought about it they would realize that their business is their most valuable asset. It is basically the source of all their assets. When you consider asset protection you should see the value of both your personal and business assets. Even though business owners do tons of “asset protection” trying to protect their personal assets, they need to protect their businesses too. Many businesses are lost when a personal disaster strikes.
Business structuring using an LLC has double asset protection. Like a corporation, an LLC has all the aspects of the corporate shield, but it also has partnership charging order protection. This gives an LLC a distinct advantage. The LLC protects from both sides of the door. You may be wondering, “If LLCs are so good why are corporations still the most common business entity? It is because LLCs plus charging order protection are “relatively” new. Corporations have always been the “standard business entity.” People have heard of them and so they use them. Still when you do the research you will probably find that an LLC is the best small business entity.