We gave a brief introdution to the concept of Asset Protection. Today we will dig a little deeper by explaining the first level of Asset Protection. Level 1 Asset Protection is the use of business entities. Everyone engaged in a business or professional practice should consult an experienced business attorney to consider the formation of an Asset Protection entity, such as a corporation, LLC, LLP or LP, to help protect both the business assets placed in the entity and owner’s non-business assets owned outside of the business entity.
The creation of one or more entities such as an S corporation, a C corporation, a Limited Liability Company (LLC), a Limited Partnership (LP), a Limited Liability Partnership (LLP), a Family Limited Liability Company (FLC)(FLIC), a Family Limited Partnership (FLP)(FLIP), an asset protection trust and other types of entities are important steps in creating an asset protection strategy. The asset protection shields crated by formation of these entities can offer some protection to both the assets “inside” the entity and the owner’s personal assets held “outside” the entity.
Entity Asset protection can be classified as “Inside-Out Asset Protection” or “Outside-In Asset Protection”.
Inside-Out Asset Protection is the protection a business owner’s personally owned assets receive from claims against a business entity that provides an asset protection shield. Inside-Out Asset Protection prevents a third party creditor who sues and gets a judgment against the business entity from reaching the owner’s assets held outside of the entity. For example, in most fact situations, a third party creditor who gets a judgment against a corporation or an LLC cannot go after the owner’s assets that are not owned by the corporation or LLC. That is, a claim against an entity such as a corporation, cannot reach an asset “outside” the entity, such as a house held in the name of the shareholder. Corporations and LLCs provide similar levels of “Inside-Out” Asset Protection.
Outside-In Asset Protection is the protection received by and entity’s assets from claims against an owner of the entity, such as a corporation, an LLC or another type of business entity that provides an asset protection shield. Outside-In asset protection prevents a third party creditor who sues and gets a judgment against the owner of the business entity from getting to the assets “inside” the entity, that is, the assets owned by the entity. In fact, in many situations, LLCs can provide better “Outside-In Asset Protection” than can corporations.
We will continue this discussion of Asset Protection with an explanation of the second and third Levels of Asset Protection.
This article was originally published on jgpc.com. See the article titled “Level 2 & 3 Asset Protection” for the next part of the series.