Using a Properly Structured Entity to Protect your Assets

Many business owners want to protect their personal estate from liability relating to their business. In order to get basic personal asset protection, business owners have several options: they can form a Limited Liability Company, a C-Corporation, or elect to act as a sub-chapter S-Corporation. A sub-chapter S-Corporation will allow you to treat your small corporation like a partnership for income tax purposes. Both an LLC and a Corporation will provide asset protection for your privately owned property held outside of the business. However, many people don’t receive proper asset protection, as they choose the wrong entity or don’t comply with the ongoing requirements.

If you use an LLC as your insulating legal mechanism, it’s important to have more than one member in your company. A multi-member LLC gives far greater asset protection than a single-member LLC. A husband or wife can often act as another member in your LLC to provide greater asset protection. However, professionals can’t utilize this technique, as they have restrictions on who can act as members in their Professional LLCs. Hence, a solo physician cannot add his or her spouse as another member in the PLLC, unless the spouse also is a licensed physician. In these types of situations, it is better to form a corporation and make a sub-chapter S Corporation election for your business.

Unfortunately, most small businesses that incorporate forget to follow key corporate law requirements, such as writing bylaws, holding annual meetings for shareholders, electing officers, or keep minutes of important decisions. Businesses that file but fail to include these components may lack asset protection, as creditors may be able to sue your company and get to your personal assets by “piercing the corporate veil.” The court can ignore your corporation, rule that it doesn’t exist, and ultimately side with your creditors. For multi-member companies, we prefer LLCs, as they lack these corporate requirements. However, all businesses require good recordkeeping. Fortunately, multi-member LLCs can provide a greater degree of protection from creditors for those with poor legal records. C type corporations have the same record keeping requirements as an S-corp.

If you need assistance properly structuring an entity to protect your assets, or if you have questions about wealth transfer strategies or tax planning, consider W.G. Alexander & Associates – we offer a unique blend of asset protection, Elder Law and estate planning. You can also attend our free seminars, learn more through our website at www.wgalaw.com, or call us at (919) 256-7000.

Attorney Bill Alexander discusses these issues and more every Tuesday morning on W.G. Alexander & Associates’ radio program, “Asset Protection Today,” on TalkRadio 850 WPTK (AM). Be sure to listen from 9:00-10:00 AM.