July 12, 2023
A series of blogs on Asset Protection….
Having seen a couple of examples of a creditor (or debtor) building in delays in order to gain an advantage, let’s go back to square one and talk about limiting liability when starting the enterprise. The basic entity choice is a part of the asset protection process. Most readers will be familiar with limited liability entities (e.g. Corporations, Limited Liability Company, Limited Partnerships, Trusts) and that is where we start.
These entities limit the liability of the owners to their investment so long as they follow the rules and have not agreed to become personally liable for the entity’s debt. Simply put, let’s say Bob and Harry start BH, LLC (a limited liability company) and each agree to invest $10,000. BH, LLC starts to do business (following the proper rules – (more on that later) and, unfortunately, burns through the $20,000 initial capital and incurs another $50,000 in trade debt that it ultimately cannot pay. Generally speaking, if Bob and Harry see that their business cannot continue and shut it down, they should not be liable for any part of the $50,000. By properly utilizing the limited liability company, they have effectively limited their liability.
As time goes on, we will talk about the “rules” that need to be followed and the scenarios when creditors might be able to legitimately pierce through the limited liability shield that these entities create. This risk of personal liability can be limited, but if it does exist, it can be managed as part of a proper asset protection plan.
We have more to say about Asset Protection Planning in our next post or podcast. Stay tuned…