Estate planning is a little different for every individual and family. Some can get by with the simplest of plans, focusing on asset distribution when they die and incapacity planning to protect them from a loss of legal decision-making capacity. Others need special tools like trusts, or family limited partnerships to ensure that money stays in the family. If you own a business, you have special interests that need to be safeguarded too. Your personal assets, for example, need to be protected against litigation and other actions against the company. The good news is that an LLC can provide you with the protection you need.
The Dangers of Sole Proprietorship and Partnerships
If you own your own business and operate it as a sole proprietorship or in partnership with one or more persons, then you may think that your legal obligation to that company extends no further than to its business assets. That’s a dangerous assumption, however. The reality is that your company’s structure provides no real protection that can separate your business liability from your personal liability. What does that mean? Well, if someone sues your company, it’s not just the business assets that will be at risk; your personal assets could be exposed to liability too.
Despite that risk, many people never take the time to utilize other business entities that can provide the protection they need against that legal liability. Instead, they try to deal with the risk by utilizing insurance or other less-than-effective asset protection measures. The problem is that it’s almost impossible to carry enough insurance to protect yourself against all the various threats that are out there. If that’s the best defense you’ve got, chances are that your assets won’t survive the first lawsuit that comes your way.
To adequately protect your personal assets from those risks, you need to have some way of separating your personal wealth from the business. One of the best ways to accomplish that goal is to use a business entity that can provide those types of protections. One common way to do that involves creating a corporation. The problem there is that corporations are subject to a wide variety of rules, filing requirements, and other complex regulations that most small business owners simply don’t want to deal with on a regular basis. Fortunately, there’s another option: the LLC.
What is an LLC?
“LLC” stands for Limited Liability Company – a type of business entity that was specifically created to enable businesses to enjoy many of the protections afforded by the corporate business structure while still maintaining most of the flexibility offered by sole proprietorships and partnerships. It is a hybrid business entity that enables you and any partners to limit the liability that you have in your company to only those assets you’ve invested in the LLC.
How Does an LLC Protect Your interests?
LLCs differ from sole proprietorships and partnerships in some important ways, but the most important difference involves liability. Creditors and litigants cannot typically pursue your personal wealth when they are trying to obtain reimbursement for LLC debts. That’s not the case where sole proprietorships or partnerships are concerned. With your LLC, your personal wealth will generally be considered beyond the reach of most creditor actions, unless you’ve committed an act of negligence or willful conduct that caused some type of damage to a litigant’s interests.
For taxation purposes, the members of an LLC enjoy the same type of pass-through tax liability that they enjoy with a partnership. All business income is reported on the members’ personal income tax returns. The LLC doesn’t pay taxes. This can be a boon for partnerships as well as sole proprietorships, since it eliminates the need for separate tax filings that would occur with the use of a corporate business entity.
Protecting Your Assets
LLCs are an effective way to protect your personal assets from losses that might result from business activities. They do not, however, protect your wealth from all the other threats that seek to consume it. That’s an important thing to remember when you’re developing your estate plan, since the last thing you want is to protect yourself from one threat while you ignore all the other risks that you face. Fortunately, there is other asset protection that can help you to ensure that you have comprehensive protection for your wealth.
For example, you can use irrevocable trusts to provide asset protection that extends to areas outside of your business interests. These trusts can protect and shield wealth from a wider range of creditor attacks, help to minimize estate tax concerns, and ensure that your hard-earned money stays in your family. It’s important to remember, though, that you need to make sure that you’re using irrevocable trusts rather than the revocable variety, since the latter won’t provide the asset protection you need.
There’s also the question of how you work to obtain these protections. While you can certainly create an LLC on your own – and most government jurisdictions provide plenty of basic assistance with the process – it is advisable to seek legal counsel to ensure that your business entity is properly coordinated with the rest of your estate planning strategy. Business succession and other important planning decisions must also be incorporated into that strategy to ensure that you have the protections your need to safeguard your wealth and your family interests.
At Frank & Kraft, Attorneys at Law, our estate and business planning experts can help you to develop the strategies you need to properly protect your business and personal assets. An LLC can be an important part of that broader strategy to ensure that your wealth is safeguarded and available to be passed on to your heirs when your life concludes. We can help you to create an LLC or convert your existing business to a limited liability company so that you can begin to enjoy the protections that business entity provides. To learn more about how our legal team can help you implement the business solutions you need to secure your assets, call today at (317) 684-1100, or contact us at our website.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.