Top 5 Fundamentals for Asset Protection: Part 3

Asset Protection, Part 3

I am often asked for legal advice on asset protection topics. Though there are myriads of ways to protect assets, in this series of articles I am discussing my “Top 5 Fundamentals for Asset Protection”. Most of these topics fit for people who have some assets, but some topics fit everyone, yes even the person who owns nothing. What does that person have to protect?  Wages. We do not need to spend money on every form of asset protection. Some of the suggestions in this series are free or nearly free.

Part 1 discusses acting in an ethical and conscientious manner.

Part 2 discusses insurance for asset protection.

Protecting Assets Through Business Entities

Part 3 provides information on the asset protection available through business entities. The roots of modern business entities emerge about 400 years ago, not long after Columbus discovered America. Most people at that time had limited means. As a result, few people could afford to construct and operate the larger ships required to make a safe voyage across the Atlantic Ocean. Personal ingenuity quickly caught up to the problem. People began to pool money to fund projects large enough to cross the Ocean. The insurance industry also began around this era as well.

Problem with pooled funds arose when partners became liable for each other’s actions. In old European law, all partners were responsible for the debts of a partnership, even when the debts exceeded that of the total assets of the partnership. The corporate form presented a problem with this European concept. Shareholders sometimes numbered in the hundreds or even thousands in an given corporation. The shareholders, as individuals, had little say in the operation of the corporation. People disfavor personally liability for the mistakes of others. The law later developed to protect the shareholders limiting their liability to their investment in the corporation.

Different Business Forms

This limited liability concept is now  in the business laws in every state throughout the US. Additional options provide a variety of business forms each limiting liability for the owners. Some of these forms include corporations, limited liability companies, limited partnerships, and investment trusts.

In the ever sue happy society in which we live, we can now create a dividing line between our personal assets and the assets of our business. If a business is sued, even frivolously, it costs money to defend. Costs may quickly grow, even greater than the assets of a business. Doing business through a business entity with limited liability protection often saves your personal assets from becoming the guarantee for the business.

Selecting a Business Form

When conducting business you should consult with both your accountant and attorney in deciding which business forms suit your needs the most. In Utah, corporations are slightly more unwieldy than limited liability companies (often called an LLC). As a general rule, both corporations and LLCs have the same limited liability from the business side, however, corporations require more “corporate formalities” than LLCs. Stock in corporations may be more easily taken by creditors of the owner. Limited liability companies, in Utah, have a really nice anonymity feature not disclosing the ownership of the LLC.

LLCs and corporations are each taxed in a variety of ways. Sometimes one method of taxation saves significant taxes. When protecting assets, one is not only concerned with potential creditors, but also with using the most favorable taxation methods available. Please consult with your accountant when forming any business.

To conclude with Part 3, place your business assets into a business entity that limits liability. Corporations have been 400 years in development and now we have other limited liability entities we can use for asset protection as well.

Part 4 – Fundamentals for Asset Protection