If you’ve ever had someone prepare an asset protection plan for you, then you know one of the inevitable steps will be the creation of one or more business structures (typically LLCs) to hold title to various assets. The more you have, the more structures will be recommended. But at what point do you say “enough?” Where is the balance between adequate asset protection, and economics and practical record-keeping?
I have clients who struggle with this question all the time. It’s especially true right now, with our current economic situation. I totally get that … but I still want you to stay safe! So, here’s my take on what constitutes a “bare minimum.”
Business. Depending on the type of business you have, you can typically use a single entity. I like using an LLC here, but taxed as either a C or an S Corporation. This gives you the best combination of asset protection and tax savings.
For asset protection I prefer the LLC model over the corporation model. The main reason is how your ownership is treated by the courts. With a corporation, your shares are treated as an asset that can be seized and taken away by a creditor. If this happens, then all the assets within that business are gone, too. But with the LLC model, your ownership interests can’t be seized (usually). Your business stays intact, and so do any assets or equipment held inside.
The tax election is important, too. If you leave the LLC classified as either single-member disregarded or a partnership for tax purposes, you’ll wind up paying more in self-employment taxes than you need to.
If you have more than one business, it’s often okay to run them through the same LLC. As long as the income is being treated as earned income for tax purposes (check with your CPA or over at the Forum) if you aren’t sure), you can collapse them into a single structure. If you need to distinguish things in customers’ eyes, use d/b/a (doing business as) aliases.
Investments. When looking at investments, you’ve got other things to consider. The biggest two are purpose and equity.
With purpose, I look at what the assets are doing. For example, in a medical practice with lots of equipment, it’s often a good idea to separate the equipment from the active practice. The practice may get sued, but the equipment is much harder to get at this way.
With properties I look at homes vs. apartment buildings vs. or commercial buildings, vs. bare land. All have different risk factors associated with them. Apartment buildings and commercial buildings have lots of people on the property, and a much higher chance of an accident occurring on the premises than a few single-family homes. Bare land is especially tough. It doesn’t always matter how many fences and “no trespassing” signs you put up – you can still be found at least partially liable for an accident happening on the property.
As far as equity is concerned, I generally don’t like to see you put all your investment assets into one LLC if the combined equity is over $500,000, or if you are absolutely dependent on the money those assets earn for your survival. If your LLC winds up being sued as a negligent property owner, properties with lots of equity are particularly vulnerable – that’s easy money for a good plaintiff’s lawyer. Why bother trying to take the apartment building, with only a 10% equity stake when you can get a paid-off duplex instead, that’s worth $500k? And having your entire income stream threatened during the course of a lawsuit doesn’t help you sleep at night (or pay your legal bills).
Can You Use One LLC for Business & Investments?. Yes, and no. Yes you can, but no I don’t typically recommend it. The income streams are different. Putting them together into one entity means more taxes, no matter how you look at it. From a liability perspective you’re protected only to the extent that if you’re sued personally, your assets are safe. Get sued in the course of business, or have an issue on an investment property however, and it’s all vulnerable.