If you own a business, you have likely spent countless hours working to achieve your dreams. You understandably want to do everything possible to avoid having creditors seize your assets, particularly before you transfer these assets to the next generation. Fortunately, several options can be utilized to protect your assets.
Before discussing these strategies, you should appreciate that asset protection plays a critical role in protecting your estate from creditors as well as many types of lawsuits. Regardless of the size of your asset or how careful you are, no one is above facing these actions. You should take proactive steps to create an estate plan before you end up facing legal actions or creditor efforts. The following are some techniques that you might utilize based on your situation.
The Three Types of Business Ownership
Based on the structure of your business, you might have sufficient protection from creditors or no protection at all. If you want to fully protect your assets, you should weigh the value of changing your business’s ownership structure. Remember, three primary types of business entities are:
- C Corporations. These corporations offer limited liability exposure to personal assets owned by the principals. No personal liability under C Corporations is given to corporate debts or personal injuries incurred by third parties that are caused by either the C corporation or its workers. C Corporations offer the advantage of protecting personal assets. An exception exists, however, for personal services. Other times, personal liability might end up attached if a corporation has no significant assets and does not act as a separate entity.
- Limited Liability Company. These corporations offer fewer formalities than other business structures. LLC principals are given the same protection for liability as C Corporations as well as “pass-through” tax benefits.
- S Corporations. Income and losses in S Corporations are passed to shareholders on a personal level, which avoids “double taxation” faced by C Corporations. Shareholders in S Corporations also benefit from a degree of corporate liability protection, despite some additional limits to the number and type of shareholders as well as the type of stock that can be issued to investors.
Utilizing Trusts to Protect Asset
Another common method to protect business assets from creditors is to create a trust and then transfer assets to it. These trusts are then managed by an appointed trustee. A variety of trust structures exist, and trusts are frequently divided into irrevocable and revocable ones. Revocable trusts allow the creator to change beneficiaries and perform modifications, while irrevocable trusts involve the creator giving up control after the trust is established. The shortcoming of not being able to revise irrevocable trusts much after they are created comes with the advantage of additional asset protection.
Speak With an Experienced Estate Planning Attorney Today
Taking steps to protect your assets is critical for business owners who both want to preserve and eventually transfer their wealth. While these asset protection strategies work, you must make sure to utilize them before any claims are made against you or you might end up facing fraudulent conveyance laws. Speak with an experienced estate planning attorney today. Contact attorney Jim A Lyon to schedule a free case evaluation.