6 Unknown Strategies for Protecting Your Assets
How you structure your business matters. Yet most businesses rarely receive solid advice on how to structure their assets properly. As a result, they unintentionally put themselves at risk by making common mistakes—like placing all assets under one entity, authorizing a spouse as an officer or bank signer, or neglecting private estate planning.
Read on to uncover six often overlooked strategies that can protect your business, your assets, and your future.
If you’re serious about safeguarding what you’ve built, these steps are a great place to start.
1. Keep Real Estate Out of Your Corporation
Keep all real estate out of your corporation and own it personally in a safe vehicle such as an LLC. Set up a lease to the company of the building space. Most entrepreneurs don’t realize that this not only protects the real estate from general creditors, it is a great way to get profits out of your company by increasing the lease over time. If the company were to ever fail, you could needlessly lose the real estate and thereby suffer total devastation. Most people never give a thought to the possibility of failure and inadvertently risk everything when they really don’t need to. Even if the business were to shut down, you could rent out the building or sell it and raise much needed cash.
2. Use a Separate Leasing Company for Equipment
Keep all machinery and equipment in a separate leasing company and lease that to your business in a similar fashion to the real estate. Entrepreneurs often believe that since the bank will take all assets anyway, it only makes sense to put them into one corporation, besides it makes for extra accounting. The activity of such an entity is minimal and the accounting should be relatively inexpensive, especially compared to losing the real estate. It may make some sense with the bank, but unsecured trade creditors would also have access to all of these same assets if they were in the operating company. If a creditor were to sue and win for any reason, they would gain a secured position against the assets when they recorded their judgment. If instead you had all the machinery and equipment in a separate corporation, the judgment creditor would not have access to those assets. Additionally, they could still be pledged to the bank in a cross collateralized position without exposure to the other creditors.
3. Choose the Right Entity Type
Selecting an LLC versus a corporation can cause some angst for entrepreneurs. There are tax benefits to one over the other, but that would depend on circumstances. However while this may or may not be the best solution for your situation, an LLC can offer the best of both worlds as you can elect an S designation with the same benefits of a corporation. The difference is that you can save social security tax on earnings if you use distributions. The benefit of the LLC is that if creditors come after a corporation, they can attack the stock of the corporation, but in an LLC, they can only get a charging order against it. Many advisors are unaware of some or most of these distinctions which can add to the confusion when trying to make a decision. What I would stress is that everyone should have one or the other as an added layer of protection.
4. Use Estate Planning to Transfer Wealth Tax-Free
Estate planning can play a crucial role in protecting assets on the personal side. For example, the federal annual gift tax exclusion is now $19,000 per parent per child—or $38,000 per child per year for married couples. Therefore, each year the mother could gift $19,000 and the father could, as well to each child, or $38,000 per year per child. If you held property in a trust or LLC, as an example, you could gift the ownership interest tax free in large chunks for each child. That can also go to spouses of your children and then their children as well. So if you had one child who was married with one child, your child could receive a $38,000 tax exempt gift as well as another $38,000 to your child’s spouse and another $38,000 to your grandchild. This is how wealthy families are able to build estates that are protected from outside attack. With proper provisions, you would be able to continue to live in your home for the balance of your life and yet not really own it. Also, due to all the other family members who would have ownership, a creditor would not be able to sell someone else’s asset to settle your debt.
5. Keep Your Spouse Off the Business Records
Keep your spouse separate from your business. Do not have them own stock, make them a signer on the bank account or an officer/managing partner of the entity. These are the three things the IRS or other taxing agencies will look for. If any of these are present the spouse can and usually will be dragged into the trouble. Usually this happens because the entrepreneur wants someone else to be available to sign checks in their absence, or they feel that this will make their spouse more a part of things. It does do that, but not in a good way. Why give creditors two targets instead of just one. Besides, if one owns the business, the other could own personal items such as cars, the house etc. and insulate them from other problems.
6. Hold Your Home as Tenants by the Entirety
With the above bullet points and this one, you make great strides to protect your personal residence from creditors and the taxing bodies. There are a few ways to hold title to your home. Most people are asked a question at closing about how they want to hold title and have no idea what the question even means. Commonly, Joint Tenancy has been the default for most couples. Another is Sole Ownership or yet one more is Tenants in Common. In recent years it has become clear that Tenants by the Entirety offers the advantage that interest cannot be transferred unless both you and your spouse agree to it. This comes in very handy when the spouse is not part of the business and refuses to allow the attacking creditor to attach or sell the home. This is a rather simple and inexpensive process of filing a few documents that accommodate the change.
