Why LLCs are Better than Corporations for Asset Protection

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9-16-1Today, when a client comes to me asking about the best business structure, I’m recommending an LLC about 90% of the time. Here are my top 5 reasons for making that call:

1. LLCs are easy to set up. You aren’t struggling with trying to figure out authorized capital, stock types, and so on. All 50 states have LLC laws. 8 states also have Series LLC laws, which I love, because they’re even more flexible.

2. LLCs are easy to maintain. In some states you’ll have a simple 1-page annual filing report due each year. In many other states, you don’t have an annual report filing at all. That’s quite different from corporations, which are almost always required to file something each year.

3. LLCs are economic. For some reason LLCs can often be cheaper to file with the Secretary of State than Corporations, and their Annual Reports are often cheaper to file, too.

4. LLCs have much better asset protection. Asset protection comes in two ways: protecting yourself from your business, and protecting the business from you. An LLC gives you 2-way protection. A Corporation does not.

5. LLC’s are flexible from a business and a tax perspective. You can operate the LLC pretty much as you choose, as long as everyone agrees. If you’re the only owner, agreeing on things is simple! Plus, you can pick whatever tax classifications makes sense from your business, including the corporation tax classifications. So now you get extra asset protection plus the ability to operate as a corporation for taxes.

Let me come back to the asset protection angle for a minute.

9-16-2Both Corporations and LLCs offer asset protection that protects you from the business. That’s one of the benefits that incorporated businesses give to their owners. LLCs and Corporations are considered a separate legal person, responsible for paying their own debts and fixing their own problems.

For example, say you apply for a credit card in the name of the business, and you’re smart enough to get the type of card that doesn’t require you to personally guarantee the debt. Now, if times get tough and the business can’t pay its own way, you won’t be responsible for those charges. The creditor can’t try to come after your personal assets to repay the business’s debt.

Another example is liability for a business’s actions. Say you employ your kids in the business. One of them gets into an accident while driving on company business. Someone is hurt, and they want to sue.

If your child was driving on personal time, it would be a claim against your insurance. The insurance company lawyers would take over, the claim would be paid, and your insurance would go up. But because your child was driving on company business, it’s quite likely that your business will be named in the lawsuit, too, as the one ultimately responsible for your employee’s conduct. Your insurance company isn’t going to mind – they can shift part of the blame, and part of the claim to be paid. You, on the other hand, are possibly looking at having to pay that claim. But with your business running through an LLC (or a Corporation), the claim will go against the business, not you personally. If the business doesn’t have enough money to pay, it doesn’t have the money.

9-16-3But here’s the other side of the protection – the one that only LLCs have. Say someone is looking to sue you personally. They see you’re a business owner and figure you’ll have assets to pay off a claim. Now what?

Well, what happens is that your would-be plaintiff finds out you run the business through an LLC, and their whole claim begins to fall apart. That’s because in almost every state, your ownership in an LLC (and any assets in that LLC) are protected by law from personal creditors. Someone can’t just sue you and take away your LLC, even if you don’t have the money to pay off a claim. They have some options – for example, they can try to lien your LLC, and collect profits as they come out of the business. But a creditor cannot get at the LLC itself, or any of your assets in it. Your business is safe.

This extra protection is why LLCs are so much better than traditional Corporations. You see in a corporation, you can’t protect your ownership from a creditor. If you couldn’t pay a claim, a creditor could force you to hand over your shares in the Corporation. And, once that creditor had control of your shares, they could do whatever they wanted with your business.

One Comment

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