Asset Protection Strategies – Ways to Shield Your Assets from Lawsuits
By Walker Bailey
How do I protect my assets from lawsuits? Every businessperson and entrepreneur expects that hard work, creativity, and boldness to have a payoff. When applied with perseverance and consistency these efforts should produce a successful and lucrative career in any type of enterprise.
Yet, hard-earned wealth and financial security can disappear in an instant. It only takes a single mistake, such as a car accident, workplace injury. Perhaps it is an act of negligence on the part of a business owner or employee. Such an incident can place this wealth in immediate jeopardy. On behalf of an aggressive plaintiff, courts may be quick to snatch the personal assets of a business owner and the business itself. This includes cash, real estate, and other property.
For these reasons, it is essential for any business owner to understand the various methods of protecting financial assets. This article will provide an overview of some various time-tested strategies. We will show you how to secure your personal wealth and business assets from lawsuits and seizure.
Sole Proprietorship & Partnership Disadvantages
Entrepreneurs seeking to begin a successful business must establish a basic legal structure for their enterprise. Because of their simplicity, minimal legal restrictions, and ease of tax filing and general paperwork, Sole Proprietorships and General Partnerships are oftentimes viewed as attractive options for small businesses.
Both of these basic legal structures provide business owners with convenience and simplicity. But they offer virtually no protection against litigation. The owners of each type of business (whether a sole proprietor a general partner) are not legally separated from the business itself. For this reason, both the assets of the business and personal assets of the business owner(s) are vulnerable. Personal and business assets are subject to seizure from business-related lawsuits. Thus, Sole Proprietorships and General Partnerships do not provide the necessary protections for businesses. Money that could have been used to expand its employment, own property, and expand its income significantly is often squandered. It flies out the door to pay for legal fees, settlements and judgments.
LLCs vs. Corporations
While somewhat more involved in terms of legal structure and regulation, a properly maintained Limited Liability Company and Corporation can both provide significant protection of financial assets when the business is sued. These two business structures do have notable differences regarding protection from a business lawsuit. However, it is important to understand and compare these differenced before choosing on structure or the other for your business.
Any business owner needs to defend both his or her personal and business assets from litigation. When a business owner incorporates of forms an LLC, specific legal statutes prevent a business owner from being personally liable. Debts incurred by the business are separate from personal debts. For example, if an LLC or Corporation is legally required to pay legal damages from a lawsuit, its owner is generally not obligated. They do not need to fulfill these financial obligations with their personal wealth, real estate, or other financial assets.
While both LLCs and Corporations protect business owners’ personal assets from financial liability incurred by their businesses, a legally savvy business owner must also take personal liability into account. If a business owner personally incurs a legal financial obligation (such as damages demanded by a civil lawsuit) the assets contained in their business-stock, real estate, and other property may become vulnerable to seizure.
Asset Protection vs Lawsuit Protection
Most corporations provide little legal protection of business assets in a personal lawsuit. That is because the creditor can take the corporate shares. Thus, these assets may not be protected if the company’s owner incurs a personal legal financial obligation.
On the other hand LLCs can shield business assets from the business owner’s personally incurred financial obligations. So when a member of an LLC is sued, LLC can protect the assets that are held inside from seizure. As of this writing, Nevada, Wyoming and Delaware give this protection to one-member LLCs. Other states may require there to be two or more LLC members in order to enjoy the asset protection the LLC provides.
Both LLCs and Corporations provide a much more robust defense of financial assets than more basic legal structures. Sole Proprietorships and General Partnerships don’t measure up. So, we can see that the LLC provides more asset protection than a corporation (protecting personal assets from business-incurred obligations and business assets from personally-incurred obligations). It is common to operate a business as a corporation and hold asset (even assets of the corporate business) in separate LLCs. One LLC per piece of real estate keeps the liability incurred on one property from affecting the others.
Doing it Right
Regardless of which option a business owner chooses, it is essential to remember that LLCs and Corporations need to be properly maintained. Negligence, disorganization, and lack of proper legal maintenance can convince a court to disregard a business as a separate legal entity. Thus, failing to follow simple formalities can override whatever legal protections the legal structure of the business provides. So be sure that the company is established and operated properly. For example, hold annual meetings and do not pay personal expenses with company money.
Asset Protection Trusts
While a wisely chosen legal structure for a business can provide excellent protection of its owner’s financial assets, many business owners may desire to seek further protection. Whether or not he or she owns a business, any individual with significant financial liability (such as a physician) can safeguard these assets by placing them in an asset protection trust. In this case, a trustee legally shields the assets on behalf of the trust’s settlor. The legal ownership of the assets is separated from the trust’s settlor. Thus, the assets are shielded from legal liability and seizure.
Various forms of trusts exist, and it is essential to understand the various options thoroughly before making a decision.
To protect assets, the most common trusts belong in one of two categories: domestic and offshore. Domestic trusts are often valued for their convenience; oftentimes, would-be settlors feel more comfortable establishing their assets in a trust on U.S. soil. These domestic trusts are available in multiple U.S. states. These are states which have the enacted statutory legal protection for grantor trusts, such as Nevada. Nevada also happens to have no state income tax on individuals or corporations.
Domestic vs. Offshore Trusts
Despite the relative convenience of domestic trusts, however, they still remain vulnerable to seizure by U.S. courts, simply because they remain within the judge’s jurisdiction. If a creditor can provide clear evidence of intent to defraud or hinder a creditor of a rightfully obtained judgment on the part the trust’s settlor, for example, the assets in the trust can still be seized. This is where offshore trusts truly shine. A successfully established offshore trust (especially one established in a country with strong privacy laws, such as the Cook Islands) is outside of U.S. courts’ legal jurisdictions. Thus, is not vulnerable to search and seizure in the case of a lawsuit. Case law shows that these trusts provide virtually bulletproof asset protection.
Asset Protection Conclusion
In any case, it is essential for important seeking to establish a trust, incorporate a company, or form an LLC to seek experienced support. Setting up a company or trust is not enough. It has to be done right. Moreover, protecting one’s hard-earned financial assets is an essential and complicated task. It must be completed with great caution, dutiful research, and sound legal guidance. After all, this is your money we are talking about.