Over the last 25 years of dealing with the buying and selling of small businesses, I have become accustomed to lawyers and clients believing that creating an LLC or a corporation is the best way to protect their assets. While this is an effective start, creating an LLC or a corporation is far from effective in protecting your assets.
I always use the example of John’s Backhoe Service. John is a small contractor who bought a backhoe to install plumbing and other underground improvements. John starts small and, little by little, his business grows. The advice he is quick to receive from his lawyer and anyone else with an opinion is, “John, you’d better incorporate or do an LLC.” They assure John that creating an LLC or corporation will protect him from the liability of that business. If John owns the business himself, and is using the backhoe and hurts a little boy who is standing nearby watching him, John will be personally liable and all of his assets will be at risk to any lawsuit that comes from his actions in the business.
Creating an LLC or a corporation ensures that the liability for John’s actions will be limited to the assets of the LLC or corporation. At LWP we call LLCs and corporations a bubble; so if John’s backhoe suddenly becomes John’s Backhoe Service, LLC or Inc., then the only thing at risk of being lost if John were to hurt someone with the backhoe would be those things that are owned “inside the bubble.” Assets owned inside the LLC typically would consist of the backhoe and any cash accounts or other business assets. Unfortunately, that is not complete protection; it is only protection from the inside out!
Having an LLC or corporation protects John’s personal assets from all liabilities created by his business – and that’s where most people end, which is a mistake. Although an LLC or corporation protects John’s personal assets from the liabilities of his business, John’s business itself and his other assets are not protected from John’s personal liability. At Lawyers with Purpose, we say John’s assets, while protected from the inside out, are not protected from the outside in! If John buys his 16‑year-old child a new car and they go out and kill someone with it, John can be sued. Since John owns an LLC or the corporation, it can be taken from him as a general asset. Although some states provide protections from creditors getting inside the assets of an LLC, it is not always so. Many states require that there be more than one owner of the LLC for it to be protected. Others, while not allowing access even as a single-member LLC to the company assets, consider John’s interest in the company itself to be an asset that is subject to risk from third-party creditors and predators.
Perhaps the greatest creditor and predator to John is in fact not a lawsuit at all, but rather a nursing home or other long-term care costs. If John were to enter a nursing home, the full value of his business and all of the income it produces would be considered available in determining his eligibility for Medicaid or other needs-based benefits. This could be catastrophic, since small businesses rarely produce enough income to support the monthly cost of a nursing home stay. That’s why it’s absolutely essential: If John wants to protect his assets from the inside out and outside in, he needs to utilize an IPUG® protection trust. IPUG trusts ensure not only that John’s assets are protected from the inside out – that is, his personal assets will be protected from the liabilities of the business – but also that his assets will be protected from the outside in – John’s business and other assets will not be within reach of general creditors and predators (i.e. the kid’s car accident or a nursing home pay out).
So get really clear on how to protect people. That’s what we do at Lawyers with Purpose. Contact Lawyers with Purpose now to see how you can be effective at utilizing IPUG protection trusts to ensure asset protection for all of your client’s assets. If you want to learn more about becoming a Lawyers With Purpose member, consider joining our FREE Webinar "Four Essentials For A Profitable Practice" on April 21st at 8 EST.
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David J. Zumpano, Co-founder - Lawyers With Purpose
Dave,
A couple items to consider. First, only one state has held that single member LLCs do not get charging order protection since there is no "innocent" member. That is Florida in the case of Olmstead v FTC. Some BK courts have ruled the same way, all cases involving the Fed Govt (like Olmstead-it actually was a certified question to the Fl Supr Ct). I dont let anyone have a single member LLC.
The problem with an iPug trust is that for someone in business, you can no longer show those assets on a personal financial statement. Many businesses rely on lending but banks want net worth. Holding them in a two member LLC still shows on you financial statement but is pretty secure from outside liabilities.
I have had two clients litigate this and creditor got nothing. One state court case and one BK Ch 11 case. Just some other things to consider. Thanks.
Posted by: Scott Haugh | 04/13/2016 at 10:40 AM