If you are operating a small business as a sole proprietor, you are taking unnecessary risks. Your personal property would be in play if you are sued by a creditor or some other litigant seeking redress.
There is reason to take any chances when you can work with our firm to put an asset protection structure in place as part of your overall estate plan.
Limited Liability Company (LLC)
One of the most commonly used asset protection structures for small businesses is the limited liability company. When you establish an LLC, you would not be responsible for debts that are incurred by your business unless you personally guarantee loans or lines of credit.
When it comes to other types of lawsuits that are targeting the business or its employees, you would generally be protected, with one exception. If you directly injure someone or cause some other type of monetary damage while you are on the job, you could be held personally liable.
For the most part, the business would be protected if you are sued for a matter that is not related to your limited liability company. However, a charging order can be issued by the court, and it would allow for the attachment of payments that the LLC makes to you.
Another benefit is pass through taxation. Even though you enjoy the asset protection, your accounting is just as simple because you claim profits and losses on your personal income tax returns.
Family Limited Partnership
Another asset protection structure that can be ideal for investors and other businesspeople is the family limited partnership (FLP). You would be the general partner if you establish this type of partnership, and family members that you bring into the partnership would be limited partners.
To explain through the use of a hypothetical situation, let’s say that you own three rental properties, and you operate a restaurant. You can convey each separate piece of property into a different family limited partnership.
If a lawsuit is filed by someone that is injured in an apartment that you own, the restaurant and the other rental properties would be protected. The litigant would be suing the family limited partnership that holds the apartment building and all other property would be unrelated.
All of the respective partners’ personal property would be protected as well. If a partner is sued personally, all of the properties are held by the partnerships would be protected.
In addition to the asset protection benefits, these partnerships can facilitate asset transfers at a tax discount if you are exposed to estate taxes. Most people do not have to be concerned about them, because the federal estate tax carries $11.7 million exclusion.
A buy sell agreement can be at the core of a succession plan for small business partners. With the agreement called the cross purchase plan, the partners take out life insurance policies on one another that will pay an amount that is equal to the value of a business share.
After a partner passes away, the insurance proceeds will be collected. They will subsequently be used to purchase the deceased partner’s ownership interest from their estate. There is also the entity purchase plan, and the business entity purchases the life insurance when this plan is used.
Since we are looking at this from an estate planning perspective, we have highlighted the utilization of life insurance. However, the funding can come from another source to facilitate retirement or the ability to step away for some other reason.
Schedule a Consultation Today!
We are here to help if you are ready to work with a Burbank, California estate planning lawyer to put a plan in place. You can schedule a consultation if you call us at 818-937-2335, and you can use our contact form if you would prefer to send us a message.