Why Incorporate?
Proptect Yourself - Your Home - Your Assets

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  “The only way to truly achieve asset protection is to remove the incentive for someone to sue you.”

 Limited Liability Companies have become popular among all business types in the last number of years. The best way to avoid liability is to establish an asset protection strategy before you need it. Once you have been served with a lawsuit, it is too late to start considering your asset protection options.

Asset Allocation

Make a list of everything you have to lose. You might be surprised to realize you have more than you thought. This list will become invaluable when putting together your asset protection plan. Be sure to include a column for your business assets and your personal assets.

Keeping A Low Profile

You know the old saying “I’d rather be rich than famous”. When you’ve worked hard to get where you are in life, it’s difficult not to flaunt it, even a little bit. If you are a small business owner, you are already perceived as being wealthy by your neighbors, family and employees. They don’t realize how hard you work just to keep the business going. It’s important to keep a low profile and to not voluntarily give anybody reason to think you have more than you do. The only way to truly protect your assets is to take away the incentive to be sued.

Separate Your Assets

If you own several rental properties, it is wise to separate each property into a different entity. In the event that you are sued, only one property can be named in the suit. Many companies do this with equipment or vehicles. They run their main operating business in a corporate structure and hold property and equipment in a limited liability company.

"It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have it, it requires ten times as much skill to keep it."

The time to develop an asset protection plan is when your legal seas are calm.  You must take action now to move your assets onto safe ground before you are involved in a lawsuit.  It’s a small price to pay for the peace of mind that can only come from 100% asset protection.

The highest level of risk falls on those who think they are immune from litigation. They don’t plan, they don’t prepare and then they are hit with a devastating lawsuit

Imagine everything you’ve worked for on the brink of collapse, sleepless nights, endless depositions, and deep pocket lawyers. Win or lose most small businesses do not recover from a lawsuit.

The greatest risk comes from small business owners who fail to utilize the asset protection provided by a properly structured business entity such as a Corporation or Limited Liability Company. As a Sole Proprietor or Partnership, your personal and business assets are on the line.

“I’m just a small business owner, what do I have to lose?”

Sit down and make a list of all your assets….house, cars, retirement, savings, college accounts, equipment and inventory.   When you look at the big picture do you really feel like rolling the dice, crossing your fingers and hoping that the next knock on the door isn’t a process server?

The decision to implement an asset protection plan really comes down to a lifetime of hard work and what you’re willing to pay to keep it.

“ Anyone in business, going into business, or anyone with valuable assets or working to acquire valuable assets, should consider forming a Corporation or Limited Liability Company . ”

Forming a Corporation establishes a protective barrier between your business assets and your personal assets. In many cases, business owners will use different entities for different parts of their business to receive a reduced tax rate and greater liability protection.

Limited Liability Companies - LLCs

A Limited Liability Company (LLC) is a hybrid between a Corporation and a Partnership. An LLC provides the liability protection of a Corporation with the pass-through taxation of a Partnership. Limited Liability Companies are becoming popular due to their flexibility in management and the personal liability protection offered to its members.

While LLCs don’t provide many of the same fringe benefits as a Corporation, the flexibility and simplicity of ownership make it the ideal tool for a small company looking for liability protection.

The owners of an LLC are called members and they work in a similar capacity as the shareholders of a Corporation. The members buy interest in the LLC with cash, property or the promise of payment.

LLCs have far fewer restrictions on membership than an S-Corporation has on shareholders. LLCs also allow members to participate in management of the LLC without losing their protection from liability, whereas a limited partner in a limited partnership does not have this benefit.

Corporations can even be a member or manager of an LLC.  This allows greater flexibility than an S-Corporation which places restrictions on the number of shareholders and who can be a shareholder. 

Ownership: LLCs are owned by the Members, similar in scope to shareholders in a Corporation. LLCs can be managed by its members, they may choose to have a professional manager or they can make one of the members a manager. When you form an LLC you will be asked if you want to be “member managed” or “manager managed”.  Members can be individuals or other entities, such as a Corporation.

Tax:  An LLC can be structured to be taxed as either a "pass-through" entity or as an association that pays its own taxes.

Asset Protection:  Members of an LLC have the same liability protection as shareholders of a Corporation.

Quick Benefits List: Asset Protection; Tax Savings; Flexibility of Management

Disadvantage: The main disadvantage of LLCs is their use is relatively new in the United States so there is no uniformity in the laws that govern them between individual states.

Advantages of Forming An LLC

Limited Liability - After forming an LLC, owners enjoy the same liability protection as with a corporation. Because an LLC exists as a separate entity, much like a corporation, members cannot be held personally liable for company debts unless they have signed a personal guarantee.

Tax Treatment – LLCs have a flexible tax structure, meaning you can choose to be taxed as a partnership or as a corporation.

Flexible Distributions – LLCs offer tremendous flexibility and are used for a variety of reasons including, but not limited to, rental properties, real estate and investing.

In an LLC you can allocate the way you want the profits to be distributed and it does not have to be based upon the percentage of ownership. Distributions of the LLC can be based on the total amount of membership interest each party has, on the amount of work members put into the company, or a number of other distribution formulas.

Example: There are two members in an LLC. One member is an investor who only wants to protect their investment by controlling 50% of the company, yet he will only receive 35% of the profit. The other member is doing all the work and gets 65% of the profits, even though he only owns 50% of the business.

Uses: Holding Real Estate; Trading Accounts; Operating Business

Q: Is it better to choose an S-corporation or an LLC?

A: This is the question we get asked on a daily basis and one that should not be taken lightly. Both an LLC and S-corporation offer many advantages in the way of liability protection for their owners, but they also differ greatly in ownership, management and taxing issues.

Ownership:

S-corporations are owned by shareholders, while LLCs are owned by members. LLCs have greater flexibility of management and ownership than an S-corporation. With an LLC, anybody or even another entity can be a member. With an S-corporation you are limited to 100 shareholders, they all must be a natural person, not another business entity, and they cannot be a foreign citizen.

Liability Protection:

LLCs and S-corporations are similar in the level of liability protection afforded the owners. 

Distribution of Profits and Loss:

With an LLC you have flexibility in regard to the distribution of profits and losses, unlike an S-corporation where profits and losses are passed to the individual shareholders based on the number of shares they have in the company.

Example: Let’s say Susan invests $35,000 into the LLC and Jack only invests $8,000 but does most of the leg work to keep the company going. Because of the split of work vs. investment, Susan and Jack decide that the profits and losses will be distributed 60% vs. 40%. With the LLC they are not limited to just membership interest in determining how the profits and losses will be distributed.

Taxing Issues:

Both the LLC and the S-corporation are taxed as pass-through entities, which means profits and losses pass through to the owners on their personal income tax return.

As a member of an LLC, both salaries and profits are subject to self-employment tax which is usually around 15.3%. With an S-corporation, only the salaries are subject to self-employment tax. 

Q: Can I be a one member LLC?

A: You can be a one member LLC. The biggest disadvantage is you lose the “charging order” protection if you are sued personally, but your personal assets are still protected if your business is sued. So don’t panic and rush out and make your disliked son-in-law a member of your LLC just yet. Remember anybody can be a member of an LLC, including another entity, so you might want to look at forming another LLC or corporation to become the second member.

Q: How are LLCs taxed?

A: LLCs can be taxed as either a pass-through entity, a partnership or at the corporate level. If you’re a one-member LLC, then you’re considered a “disregarded entity” in the eyes of the IRS and are taxed as a sole proprietorship. This only means that the income and loss is passed directly onto the individual 1040. It does not disregard the liability protection that the LLC offers. If the LLC has multiple members, then it is taxed as a partnership. If the LLC prefers to be taxed as a corporation, you need to file Form 8832 with the Internal Revenue Service.

Q: Can any type of business be an LLC?

A: In general banks, insurance companies and nonprofit organizations cannot be LLCs. You should check your individual state requirements and the federal tax regulations for further information.

Q: I’ve already purchased property, how do I get it into my LLC?

A: In most scenarios you can quick claim the property to the LLC. If you are holding a mortgage on the property, you will probably have to get permission from the lending company.

Q:  How do I form an LLC?

A: If you want to form your LLC, it will take about 10 minutes as you go through the simple order process. Or you can call 1-888-531-0958 and talk directly with one of our helpful business consultants. A few things you need to decide are “What is the name?” and “Who will be the members?” of your new Limited Liability Company.

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