Juggling Business Entities

My cousin came into the office with a map of an elaborate business plan. It had layers of business entities outlined on a sheet. She described her business and then wanted todiscuss all the types of entities she wanted to use. She described how effective she thought the layering of a couple of LLCs (Limited Liability Company) with an overriding S corporation for the partner would be.

At this point I stopped her and told her that her plan would be very expensive to form, plus complicated and expensive to maintain. I suggested that she use one LLC for her protection. When she asked why, I had to explain.

Your asset protection is really no better than your attention to detail. Picture a juggler. The more skilled the juggler, the more balls he can keep in the air. A novice juggler or business owner may not be able to juggle as much as someone with more experience. If you have too many business structures, you can almost guarantee that you will not be able to maintain them all, and something will fall.

Still, if you are going to be in business you need to protect your assets. First consider the types of entities available for asset protection and decide if they offer the right benefits for your business. Many business owners plan their asset protection from the business side only. They only see a liability issue coming from the business. This works great if the business gets in trouble. It blocks the creditors from coming through the court attacking the owner to get their home and savings account and other personal assets.

But what about when the business owner gets in trouble personally? Many businesses are lost when a personal disaster strikes, because they are not protected from personal problems.  Say the owner has an accident or suffers an illness and can’t pay the bills. Their business is usually their most valuable asset. Face it:  the business is the source of all their other assets. Yet if it is owned by a corporation, it does not have protection from personal troubles.

Protecting the business should be considered in any asset protection plan. A good asset protection plan will include both your personal and business assets. My cousin’s plan to have an S corporation own everything would not take care of her personal asset protection. An LLC would be a better choice because if it is structured correctly, it has double asset protection. Like a corporation, an LLC has all the aspects of the corporate shield, but it also can have partnership charging order protection.

This double asset protection gives an LLC a distinct advantage. The LLC protects from both sides.  You may wonder, like my cousin, “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 for any small business entity.