Limited liability companies (LLCs) are a popular choice among business owners for many good reasons. LLCs offer business owners pass-through taxation, and flexibility in the management structure.

But did you know that an LLC also provides asset protection?

If you’re looking for a way to safeguard your assets, an LLC might be the right choice. Here’s everything you need to know about how does an LLC provide asset protection and why you need one:

What is Asset Protection?

Asset protection is the process of safeguarding your assets from creditors and lawsuits. Many different asset protection strategies are available, but choosing an LLC offers several advantages.

In addition to offering asset protection, LLCs are often called “asset protection devices” because they can effectively shield your assets from creditors.

How Does Asset Protection Work With LLCs?

Asset protection with LLCs works by creating a barrier between your personal assets and your business assets. When you set up an LLC, you create a separate legal entity for your business.

It means that your personal assets—like your home, car, and savings account are not at risk if your business is sued or contains debt. Only the assets belonging to the LLC are at risk.

Another way asset protection with LLCs works is by making it more difficult for creditors to reach your assets. Creditors must go through several hoops to attach liens to or seize assets belonging to an LLC.

And even if they successfully attach a lien or seize assets, the amount they can collect is usually limited to the value of the LLC’s assets — meaning your personal assets remain safe. This is sometimes referred to as “inside out” asset protection because the risk is quarantined inside the LLC, which protects assets outside the LLC.

Thinking about it the other way around, an LLC can also provide “outside in” asset protection, meaning you can stuff an LLC with assets you wish protected. For example, you could transfer a savings or investment account to an LLC and, if properly structured, as long as the savings or investments remain inside the LLC they would be protected from risks occurring outside the LLC, such as a vehicle accident.

Does an LLC Provide Asset Protection?

Yes! Many people choose to form LLCs to protect their assets from being seized if their business is sued, or to quarantine “hot” assets like rental property or investment real estate.

However, it is essential to remember that an LLC will only provide asset protection if properly structured and managed. For example, if the LLC is co-owned by spouses and not properly structured, creditors may be able to reach the assets of both spouses if one of them is sued.

The primary remedy in the event the owner of an LLC is sued is a “charging order” against the LLC, which allows the creditor to collect distributions made to the LLC owners. When the owner of the LLC controls the timing and amount of distributions from the LLC, this affords the owner great leverage. 

If properly structured, a creditor cannot compel a distribution, seize the LLC interest itself, or seize assets inside the LLC. (Channelside Services, LLC v. Chrysochoos Group, Inc.) The creditor generally has no voting rights (no control) and cannot access or inspect any books, records, or financial information of the LLC. Id. In addition, the creditor could be subject to “phantom income” on undistributed earnings of the LLC, so the owner of an LLC can make a charging order very expensive for a creditor!

What is an Asset Protection LLC Structure?

An LLC is a business structure that can own almost any business or investment. An asset protection LLC structure is a legal tool used to hold assets in a way that shields them from the claims of potential creditors.

An LLC offers its owners limited liability protection, which means that the owners are not personally liable for the debts and liabilities of the LLC.

A typical Asset Protection LLC structure will vary depending on the primary source of risk. For risks associated with a business or other “hot” asset like rental property, an Asset Protection LLC structure may be established by transferring the business or asset to an LLC to quarantine the risk to protect assets that reside outside the LLC. 

An owner may also choose to transfer “cold” assets such as savings and investments to an Asset Protection LLC structure to protect such assets from risks that reside outside the LLC, such as vehicular accidents.  For example, if a pet or animal escapes causing a vehicle accident resulting in liability to the owner, assets placed in an LLC would be protected if the LLC is properly structured. 

Asset Protection LLC Operating Agreement: Why Is It Important?

An Asset Protection LLC Operating Agreement is a legal document that outlines an LLC’s ownership and operating procedures.

This Operating Agreement can help protect your assets by specifying how the LLC will be managed in the event of a legal crisis, and what happens if one of the owners dies or becomes incapacitated.

An Asset Protection LLC Operating Agreement can also establish rules for how a creditor of a member will be handled, such as a discounted buyout for a divorcing spouse.

A good Asset Protection LLC Operating Agreement helps you to avoid potential conflicts among the owners and ensure that the LLC is operated in a way that protects your assets in the event of a legal crisis. 

An Operating Agreement is not required by law in Louisiana but is highly recommended. Click the button below to learn more.

Asset Protection with LLC VS Trust

When it comes to asset protection, there are a variety of different options to choose from. Two of the most popular choices are an LLC or a Trust.  An LLC and a Trust are different devices. One is not necessarily better than the other because they afford different types of protection. 

Choosing asset protection with LLC vs trust will depend on a number of factors Each option has its own advantages and disadvantages, so it’s important to carefully consider your needs before deciding.

Let’s take a closer look over both of them:

Benefits of Having Asset Protection with LLC

Below, we have listed some of the key benefits that come with having asset protection with your LLC:

1.      Separate Personal Assets from Your Business Assets

Separating your personal assets from your business assets is important, or your personal assets will be subject to business risks. If you have an LLC, your personal assets will be protected from any debts or liabilities that your business incurs.

2.      Limited Liability Protection

An LLC offers limited liability protection. You will not be personally liable for any damages or debts if your LLC is sued.

The only exception is if you have personally guaranteed debt or have engaged in illegal activity. But other than that, your personal assets will be protected from any debts or liabilities of the LLC.

3.      Increased Credibility

When you set up an LLC, it shows that you’re serious about your business. This can help you attract more customers and clients because they will see that you’ve taken the time to set up a formal business structure.

Additionally, having an LLC can also help you get approved for loans and lines of credit because lenders will see that you’re a low-risk borrower. 

4.      Tax Benefits

An  LLC offers you some tax benefits and flexibility. For example, you can elect to be taxed as an S-corporation if you have an LLC. This can help you save on taxes because S-corporations are pass-through entities that are only taxed on one level, unlike C-corporations that are subject to double tax at both the corporate and individual levels. Also, LLCs can make tax elections that help businesses save on self-employment taxes because owners are not considered self-employed. 

5.      Improved Business Succession Planning

Setting up an LLC can also help with business succession planning. If something happens to the owner of an LLC, the ownership transfer process is typically much smoother.

Additionally, setting up an LLC can help prevent owners’ disputes regarding ownership transfer after the original owner’s death.

Risks Associated When You Don’t Have an LLC

In the following list, we will see some of the risks associated with not having an LLC:

1.      Personal Liability

One of the most significant risks associated with not having an LLC is that the business owner is personally liable for all debts and liabilities of the business. This means that if the business is sued, the owner’s personal assets, such as their home or savings, could be at risk.

2.      Tax Consequences

Another risk of not having an LLC is that the business will be taxed as a sole proprietorship. This can result in a higher tax bill for the business owner. LLCs are tax “chameleons” in that the tax attributes are flexible and take on the characteristics most favorable to the owner. An LLC offers flexibility so that the LLC owner can be deliberate in electing their tax status.    

3.      Difficulty Raising Capital

Another risk associated with not having an LLC is that raising capital for the business can be difficult. This is because investors may be hesitant to invest in a business that does not have limited liability protection.

4.      Professional Licensing Issues

Some businesses, such as engineering and construction, require members of the business to have a professional license to operate legally. Without an LLC, obtaining a professional license for the business can be more difficult.

5.      Increased Administrative Burden

Another risk of not having an LLC is that it can increase the administrative burden on the business owner. This is because sole proprietorships do not have separate legal status from their owners, which can result in co-mingling of personal and business affairs. Maintaining clear lines between personal and business affairs can simplify accounting and bookkeeping.

To learn how to start an LLC in 3 easy steps with GeauxPlans, click the button below.

Final Verdict

Overall, there are many benefits to setting up an LLC for your business. An LLC can offer limited liability protection, tax benefits, increased credibility, and improved business succession planning.

Some risks are associated with not having an LLC, such as personal liability, difficulty raising capital, and increased administrative burden. So, if you’re considering starting a business, you should consider setting up an LLC!

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