When you are going into business for yourself, you will have a lot on your mind. The logistics are complicated, and you also have to think about the business structure that you will utilize.
It is important to separate your personal property from your business as an entity, because lawsuits are not uncommon in this litigious society. In this post, we will look at two commonly used asset protection structures, and we will also share some information about buy-sell agreements.
Family Limited Partnerships
A family limited partnership (FLP) can be a good asset protection structure for certain businesspeople and investors. As the name would indicate, the members of the partnership must be in the same family. If you establish the partnership, you would be the general partner, and family members that you include would be the limited partners.
The best way to explain how an FLP can be beneficial is through the utilization of a simple example. Let’s say that you own two shopping centers and two apartment buildings. Someone could get injured while they are on one of the properties, and they could potentially file a personal injury lawsuit.
To protect your assets, you could convey each of the rental properties into a separate family limited partnership. If someone is injured in one of the apartment buildings, the shopping centers and the other apartment building would be protected from legal actions.
Your personal property and property that is owned by all the other partners would also be out of the reach of a litigant seeking redress. On the other side of the equation, if any of the partners is personally sued, the properties that are held by the partnerships would be protected.
The unified federal gift and estate tax is a factor for very high net worth individuals. Members of a family limited partnership can potentially transfer assets among one another at a tax discount, and this is another advantage.
Limited Liability Companies
The limited liability company or LLC is another commonly used business asset protection structure. Once again, under most circumstances, your personal property would be protected if someone files a suit against the business, and vice versa.
You get the asset protection, but you do not sacrifice any efficiency and simplicity when it comes to accounting. If you establish a limited liability company, you would be able to claim profits and losses on your personal income tax returns. This is called “pass-through taxation.”
Succession Planning for Small Business Partners
Since we are sharing information that can be of value to people that operate small businesses, we will briefly explain the buy-sell agreement as a succession tool.
With the agreement called the cross-purchase plan, the partners would take out life insurance policies on one another. The payouts would be equal to the value of a share in the business. When one partner dies, the proceeds would be used to buy the deceased partner’s share from their estate.
It is also possible for the business as an entity to purchase a life insurance policy on each person that holds an ownership share. This can be an estate planning approach with life insurance at its core, but an agreement like this can also be utilized to provide a general exit strategy for business partners.
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