Choosing the right legal protections
Protecting your business starts before you open for business. As entrepreneurs, we take some tremendous risks, so it is beyond imperative to protect our financial assets, both personal and professional, in these increasingly litigious times.
We must take advantage of every opportunity presented to avoid various forms of unnecessary liability. Understanding the different forms of asset protection is the first step toward choosing the right legal protection for your business.
DON’T GO IT ALONE
One mistake a budding entrepreneur may make is conducting business as a single-member limited liability company. Your ability to grow and maintain wealth will likely depend on placing assets in the correct legal entities.
For that reason, a limited liability company (LLC) is the most sought-after asset protection vehicle. An LLC offers double asset protection; one form is the same as a corporation and the other as a limited partnership.
PROTECT PERSONAL FROM BUSINESS
A corporation protects its owners from liability in that the shareholders are sheltered from the debts and liabilities of the business. This type of protection is available to a C corporation, an S corporation and an LLC. When the company is liable for a debt, the personal assets of the shareholder or member will not be subject to the business’ fiduciary responsibilities.
PROTECT BUSINESS FROM PERSONAL
A limited partnership protects the interests of the company from your personal creditors. Any and all assets that you put into an LLC can be safe from your personal debts, provided that your LLC is set up correctly.
The requirement to receive this double asset protection is having at least two members in your limited liability company. A single-member LLC will not receive the privilege of both types of protection. The law states that if an LLC has only one member, a creditor who wins a judgment against you can take your company and everything in it.
RULES TO ABIDE BY
Not having the proper operating agreement in place for your business is another mistake that new and seasoned entrepreneurs tend to make. While many public companies advertise that organizing your business legally can be quick and simple, it’s up to you to go the extra mile needed for your long-term success.
An operating agreement is the document that spells out rights and obligations of members and the rules for running your company. It is not required in every state, but having one is the best thing that you can do for yourself. If your members have not signed such an agreement, the rules provided in your state’s statute will apply in the event of a dissolution, wind-up, cancellation or bankruptcy.
Transitioning from an existing partnership into a new legal structure can afford entrepreneurs greater protection from adverse claims. Existing assets and liabilities can simply be transferred to the new limited liability company.
The internal revenue service recognizes that converting a sole proprietorship or partnership into a limited liability company is a change in legal structure of an existing business and not a sale of assets from one business to another. Since the transfer will not be a taxable sale, business owners are not obligated to pay taxes.
DECLARATION OF TRUST
A business trust is an unincorporated business organization created by a legal document, better known as a declaration of trust. It is used in place of a corporation or partnership for the transaction of various kinds of business with limited liability.
For the most part, the trust is a private, voluntary arrangement between the parties involved. A charter from the state is not needed to recognize this legal entity, and there are no articles of incorporation, annual reporting or expensive initial corporate reports to file with the state.
Entrepreneurs are attracted to the privacy that business trusts afford them. Those who understand the true power of this entity appreciate not having to file anything with the secretary of state, with certain exceptions like servicing the public with insurance products or in banking.
The reality is that the more exposed you are as an entrepreneur, the more likely it is for you to be pursued by someone seeking to cause you financial harm. Secure your vision by building your legacy on a solid foundation and choosing the right legal protection.
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