The Personal Limited Liability Company
Incredible Result: “No one can take what our Family has built.”
Avoidable Train Wreck: Personal risk exposures deplete your personal resources.
Main Play: The Personal Limited Liability Company
What This Is: You have helped protect your personal investments from potential future business or personal lawsuits, accidents, creditor claims or divorce claims by carefully observing asset protection protocols and by transferring your personal investments into an asset protection entity.
So, you’ve spent years earning and saving. The question is whether your personal investments are being protected from the various litigation, finance and life risks which business leaders and their families face.
The Personal Wealth Protection System
In the litigious society in which we live, it is generally prudent to protect your hard-earned assets through certain asset protection power tools. These types of tools can protect your investment and other assets against unwarranted and unexpected, but potential, creditor claims, which may arise, for example, from business operations, personal accidents, personal injury, or other casualties and contingencies.
The following are some examples of the Fourth Quarter personal asset protection power tools which Family Business Pioneers are deploying:
- Observance of Corporate Formalities. It is common knowledge that if you operate your business within a limited liability type of entity (such as a corporation or a limited liability company), then you are generally protected, as an owner, from liabilities incurred by the business operations. However, a significant exception to this rule is the legal principle known as “pierce the corporate veil”. Under this principle, if you have not observed the corporate formalities of operating as a separate corporation or limited liability company, then, if challenged, a court has the authority to “pierce the corporate veil” by ignoring the presence of the corporation or limited liability company. Typically this occurs when two principal facts exist. First, when you have not provided reasonable operating funds within the business entity. Second, when you have ignored the usual formalities of treating that corporate entity as a separate legal entity (e.g. because you have not maintained separate bank accounts and corporate business records).
- Removal of Personal Guarantees. During the course of the life of your business, you may have been required, in order to obtain bank financing, to sign a personal guarantee on business debts. As your business becomes able to financially stand on its own, the removal of your personal guarantees should be negotiated when your business loans are being refinanced or replaced. This extends not only to your personal liability, but also to your pledge of personal assets as collateral for business obligations.
- The Personal Limited Liability Company (or Trust). Occasionally we find that business operations are being conducted by some business owners without the protection of a limited liability entity (i.e. a corporation or limited liability company). For example, if your business is held in your name as a sole proprietorship, or is held in a general partnership or a limited partnership, you run the risk, as the business owner, of being liable for all of the business debts.
- Bloodline Planning Trust. When investment assets are transferred out of your name as a gift to a family member, then those assets are not subject to your future personal risks. Gifted assets, however, become subject to the personal liability risk of the individuals who received your gift. By transferring investment and life insurance assets (in collaboration with your professional Insurance Advisor) into a Bloodline Planning Trust for the benefit of your children or grandchildren, you can remove the assets you don’t need from your future personal exposures. By placing spendthrift provisions and distribution guidelines in the trust, you can also provide protection for those assets from the personal liability exposures (financial, business, marital, substance abuse, etc.) of your children and grandchildren.
- Multiple Business Entities. If you operate certain businesses which are more risky than others, then you can consider placing the businesses into separate business entities, so that a given business risk does not expose all of your business assets to those liabilities.
- Asset Balance Between Spouses. Both spouses have a certain amount of potential liability exposure (e.g. due to personal accidents). However, typically, the spouse who is active in business has a greater level of potential liability claims. By balancing your assets between the two spouses, you can minimize the risk of a more substantial loss of assets than if your net worth is entirely in the name of the spouse who is most subject to liability exposure.
- The Personal Limited Liability Company (or Trust). Just as you can place a business operation into a corporate entity to shield yourself from those business risks, you can also place your personal investment assets into certain types of limited partnerships, limited liability companies, and asset protection trusts, in order to shield those assets from your business and personal risks. Though not foolproof, under these types of entities, a litigation judgment against you can typically not be collected against the assets of the asset protection partnership, LLC or trust. Asset protection partnerships, LLCs or trusts established in the United States can provide a certain degree of protection. Due to more favorable laws enacted by some countries, a foreign asset protection trust can provide a higher degree of protection, although it also costs a significant amount more to implement and its effectiveness has been challenged in recent years.
- Proper Insurance Coverage Mix. The proper mix of business and personal casualty insurance protection, along with business and personal umbrella insurance and long term care insurance, should be implemented and periodically reviewed, depending on changing business operations and personal situation.
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