Posted by: Coto Legal Services, PLC | March 11, 2011

Asset Protection

Entity Structure – Asset Protection

As many people start their own business, one must decide what type of entity structure to form.   The form of business or entity choice significantly determines the extent your assets will be protected and the amount of taxes you must pay.

Before I begin, let me mention that there is a distinction among tort, contract liability and all other types of liability.  No entity structure will protect assets from tort and contract liability.  Tort liability  addresses  owner’s negligent  acts, which can only be protected by malpractice insurance.  Contract liability occurs when parties, such as banks, landlords and suppliers require business owners to personally guarantee the entity’s obligations.

Therefore entity structure is critical to protect one’s assets from liabilities, other than tort and contract liabilities.   Although you may think that insurance covers these liabilities, but what happens if lawsuits exceed your insurance coverage, or the insurance company informs you that it will not pay your claim according to the fine print.

Unfortunately many people do not even think about entity choice until long after they start their business, but this could be disastrous in terms of protecting one’s assets. You can lose all or a significant portion of your assets by not structuring your business correctly.   Consequently, by default, a solo person finds himself or herself in a sole proprietorship or if there are two or more people starting the business, then in a partnership.    These business forms offer no limited liability protection and its owners will be personally liable for their businesses obligations so creditors can reach the personal assets of the business owners.

So, for asset protection reasons alone, most people decide or are advised to incorporate or form a limited liability company.   However, a lot of people are under the wrong impression that just incorporating or forming a limited liability company will achieve limited liability.  A court may “pierce the corporate veil” if the court believes that you are not treating the corporation or limited liability company as a separate entity.   If the corporate veil is pierced,  the owner will be personally liable for the entity’s obligations and the IRS may recharacterize corporate income and expenses as owner income and expenses. Therefore, it is critical that you treat the business as a separate entity and observe corporate formalities.

What about business asset protection?   Many businesses, incorporated or not,  employ a single entity structure,  so the business assets are not protected against lawsuits or its creditors.  These business assets are not segregated from the operating activities of the business and are therefore exposed.  Additionally, if you incorporate, the creditor may gain access to your business assets, which could be prevented by choosing another form of entity structure.

This post  focuses on asset protection issues when adopting a business structure, but there are other major issues, including tax implications, that will affect what entity structure is best for you.  A professional tax and business law professional should be consulted.

Coto Legal Services, PLC will be happy to answer any questions or assist you and your company with asset protection matters. We will protect all of your assets!  Please visit our website at http://www.cotolegal.com for information about our law firm.  Email: rcoto@cotolegal.com; telephone: 734-634-7271.

This information on this blog is not intended to be legal advice and viewing this blog does not create an attorney-client relationship.


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