Using a Properly Structured Entity to Protect your Assets

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For any business owner, one of the primary goals is to shield their personal assets—their home, savings, and investments—from any liability related to the business. Forming a legal entity is the first and most critical step in creating this protective barrier. However, simply filing paperwork is not enough. Choosing the wrong entity or failing to operate it correctly can leave your personal wealth dangerously exposed.

Understanding Your Options: LLCs vs. Corporations

In North Carolina, the two most common choices for creating liability protection are the Limited Liability Company (LLC) and the Corporation (either a C-Corp or an S-Corp).

The Limited Liability Company (LLC)

LLCs are often preferred for their flexibility and strong asset protection, especially for multi-member companies. A key advantage is that a multi-member LLC offers significantly greater protection than a single-member LLC, which can sometimes be disregarded by courts. For many family-owned businesses, a husband and wife can act as the two members, creating a robust protective structure. LLCs also have fewer strict formal requirements than corporations, making them easier to manage.

The Corporation (C-Corp and S-Corp)

Corporations are a more traditional business structure. The primary difference between a C-Corp and an S-Corp lies in taxation. An S-Corporation allows the company’s profits and losses to “flow through” to the owners’ personal tax returns, which can be advantageous for new businesses. However, corporations come with strict statutory requirements, such as issuing stock, appointing a board of directors, and holding annual shareholder meetings.

The Biggest Risk: Piercing the Corporate Veil

Regardless of the entity you choose, your asset protection is not absolute. If you fail to operate your business as a separate legal entity, a court can “pierce the corporate veil,” ignore your LLC or corporation, and allow creditors to come after your personal assets. The most common mistakes that lead to this are:

  • Commingling Funds: Using the business bank account to pay for personal expenses (or vice versa) is the fastest way to erase the line between you and your company.
  • Ignoring Corporate Formalities: For corporations, this means failing to hold annual meetings, keep minutes, or issue stock. For all entities, it means a lack of good record-keeping.

Making the Right Choice for Your Business

Selecting and properly maintaining your business entity is a foundational legal decision. It is the cornerstone of your family’s financial security and a critical part of your overall business succession and estate planning. An experienced attorney can help you choose the right structure and ensure it is operated in a way that provides the maximum protection for your personal assets.

Call our office at (919) 256-7000 to schedule a consultation.