A popular topic raised by entrepreneurs, clients and business owners is protection - how best to protect and preserve their personal and business assets.

There are several aspects of protection for you to consider:

Insulate Yourself from Your Business

Insulation keeps you warm in the winter and cool in the summer, or so we are told. Insulation from your business also keeps you safe from problems your business may encounter. A lack of insulation could prove devastating. Unregistered entities, such as a sole proprietorships or general partnerships are not insulated entities, and using either of them for your business operations is a very bad idea.

For example, if you run a one-man plumbing operation as a sole proprietorship and are sued for faulty work by an angry customer, there is nothing protecting your house, your car, your boat and your bank account from the hands of creditors. In a sole proprietorship you are your business, with sometimes disastrous results.

Another example would be forming a two-man plumbing operation as a general partnership with your buddy. Now you are not only liable for everything you do, you are also liable for anything your partner does as well. That also includes purchases made by you or your partner in the name of the general partnership. And in a general partnership situation, one partner's signature is enough to bind both partners to a debt or other obligation. So you might not even know what your partner is up to until it is too late.

To insulate yourself from your business, use a proper, registered corporate entity, such as a C or S corporation, a limited liability company or a limited partnership. Follow proper corporate formalities, including keeping your company's state registration up to date, holding annual meetings and keeping annual minutes, operating your business's financial affairs through a separate bank account and not signing any business-related documentation in your own name. That way, you remain safely insulated from the debts and disasters of your business.

Protect Your Business Assets

The best way to protect your business assets is insurance. Lots and lots of insurance. Let's use real estate holdings as an example. Putting your rental property into an LLC is a great idea. In fact, we recommend that all appreciating assets be held in either an LLC or a limited partnership. Either entity protects and insulates you personally from liability, should anything happen in or on the property. But using an entity is only half of the protection strategy. What if there is an accident on your property, or the roof falls in on some unlucky tenant? How can you protect your LLC's assets from a subsequent claim by an injured tenant? Without insurance, or even with insurance if it is inadequate, there is little to stop a claimant from asking the Court to seize and sell your property at auction, to satisfy that claimant's damage award.

A good, comprehensive commercial insurance policy can help and may even be the difference between you keeping the property and you losing the property in a court-ordered settlement. Here are some points to look for. First, you want to see liability insurance covering injuries to third parties on your property. Make sure that it covers possible instances of trespassing, particularly if you own vacant or undeveloped land.

Other things to consider are workman's compensation insurance, if you have employees working on or maintaining your property. That way, if they are injured on your property, you are covered. Look for an "increased cost of construction" feature, so if your building is damaged and requires reconstruction, you are covered at today's construction prices, not those from 10 years ago. Consider a "loss of rents" rider, so that if your building is damaged to the point where the tenants are required to vacate you can (a) pay their relocation costs; and (b) receive income from the property while it is being rebuilt to offset the rent you are losing. And finally, consider a "higher limits" rider, to provide a little extra protection in the event of a catastrophic claim in one or more of these categories.

Good insurance can help to insulate your LLC or other entity from the claims of others and protect your business assets.

Preserve Your Personal Assets

Here is another frequently-asked question: "If I am sued personally, my assets are at risk. If I put my assets into an entity and that entity is sued, then my assets are at risk again. How can I preserve my assets from nuisance claims, or claims that are not directly related to either my business or my assets?"

This scenario arises frequently and the answer, to some extent, depends on where you live. For example in Nevada, the law allows a charging order to be attached to LLC or limited partnership interests. A charging order is like a lien placed over your share of income earned through either of these entities. A portion of the income you would otherwise have received is siphoned off and paid to your creditor until their judgment against you is paid. However, that creditor does not gain any voting rights over your LLC or limited partnership interests, nor can they force a sale of assets held by the LLC or limited partnership in order to pay off their claim. And in Nevada, this is the only legal remedy available to creditors where the debtor's assets are held in an LLC or a limited partnership.

As you can see, if you are a Nevada resident and all of your assets are held in a Nevada LLC or limited partnership, this is a great protection strategy. But what if you aren't? What if you are a New York resident holding a Florida property through a Nevada limited partnership? Or a California resident holding a Massachusetts property through a Massachusetts LLC?

In either of these scenarios, if you are sued personally the jurisdiction will likely be in your home state. Unfortunately, not all states offer the charging order remedy, and not all states make it the only legal remedy allowed to creditors. And, even if you use a Nevada entity to hold your assets, if you are sued in your home state, or the state in which your real property is located, those are the laws that will apply.

What we suggest in this situation is a three-level approach that looks like this:

The end result of this structure is that no matter where you are sued personally, the only thing that you actually own are your interests in a Nevada or Wyoming LLC. So, any creditor attempting to seize your LLC interests would have to come to Nevada and once there, would become subject to Nevada or Wyoming law, and thus caught in the charging order procedure. A Wyoming LLC will also work in this situation.

Again, remember that this strategy is designed to work for you personally. If your asset-holding LLC is sued directly, rather than you personally, this scenario will not apply.

For more information and a complete overview of the most effective uses of LLCs and limited partnerships, please see my book, How to Use Limited Liability Companies & Limited Partnerships, published by SuccessDNA, Inc., and available through our website, www.successdna.com. Or contact us to set up a consultation with one of our attorneys to review your specific situation. Our toll-free number is 1-877-297-5399, or you may email us at info@sutlaw.com.

This document is distributed for informational use only; it does not constitute legal advice and should not be used as such.

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