LLC Asset Protection – Are Your Personal Assets at Risk?
LLC asset protection is how your LLC and asset protection go hand in hand, but most people who have an LLC don’t understand the value of asset protection a good LLC can give them. Advisors, including attorneys, usually don’t mention the “other side” of asset protection that an LLC can give if it is set up properly.
Because the other side of LLC asset protection isn’t understood by the clients and many attorneys, the LLC operating agreement usually isn’t written to maximize the asset protection potential of the professional LLC.
The LLC asset protection everyone associates with an LLC is the “corporate shield.” The corporate shield protects the members and managers (stockholders and directors) in the LLC from liabilities that occur within the LLC. If the LLC gets sued, the personal assets of the members and managers are protected. This is the “limited liability” that everybody thinks the “Limited Liability Company” offers.
LLC Asset Protection Offers More
The LLC asset protection offers more. Lots more! It offers protection for the company from the personal liabilities of the owners (members). If you’re the only owner, that becomes very important. Your little business could be the most valuable asset you have. It has inherent wealth, and is the way you make your money.
Your advisors have never sat you down and said, “Ok let’s figure out how LLC asset protection works for your company.” The discussion always centers on how to protect you from your company’s liabilities. And that’s good, but it’s only half of the battle.
A full discussion of the “inside out” and “outside in” LLC asset protection you can get is impossible here. Check out my special eBook, “How to Double Your Asset Protection.”
The reverse asset protection that an LLC offers is well defined in the 2006 Uniform Limited Liability Company Act that forms the basis for most state’s LLC laws. It is an old English law concept originally designed to protect partnerships from the personal creditors of each partner.
As you know, a partner can conduct business on behalf of the partnership. Each partner alone has full power and authority to deal with the assets of the partnership, bind the partnership, and deal with the partnership any way he or she wants. No approval or knowledge of the actions is required from the other partners.
Never become a partner, because each partner is jointly and severally liable for the acts of every other partner. That’s scary!
Centuries ago it was recognized that if three partners worked their whole life putting together a business, the entire business could be lost due to the “personal” acts of any one of the partners.
Personal acts include things like a divorce, lawsuit from an auto accident (donkey cart back then), bankruptcy, lavish living, or any one of a thousand other acts. If one partner got in trouble, his or her partnership interest would be taken by their creditor, and suddenly, the other partners had a new partner – an unfriendly partner.
The new partner could do whatever they wanted with the partnership assets. The other partners lost everything. That’s not fair. The law recognized that it wasn’t fair and created a set of laws that would protect the other partners from the idiot acts of one partner.
A form of these old English laws found their way into the new LLC laws. COOL!
That means if one member (partner) gets in trouble, the other members don’t suffer. The LLC itself is protected. This type of LLC asset protection is not available to corporations.
When one of the stockholders in a corporation gets in trouble, their creditor will come after their assets. One of their assets is the corporate stock. When the creditor gets the stock, the creditor now controls all the voting rights available to the stockholder.
If the stockholder has IBM stock, IBM really doesn’t worry because the creditor has almost zero influence by himself as a single stockholder out of millions. If the stock is eighty percent of the stock in your little company though, the creditor simply votes in himself as the new officer and director. He now controls everything about the company.
Yes, I understand there are minority stockholder rules, but effectively the guys that hold the other twenty percent of the stock in the little company just lost everything when the creditor takes over. If you are the only stock holder, it’s even worse. You lost your entire company – your entire life’s work.
That’s not fair, but it is the corporate world. You need to learn to use your LLC to get both the corporate shield protection and the company protection from your creditors. The “How to Double Your Asset Protection” eBook is a comprehensive report that will explain what you need to do to get the maximum asset protection out of your LLC.
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