There are several types of asset protection vehicles that can help you protect your assets. These include; corporations; partnerships; and trusts.
Corporations refer to business organization types that are formed as per state laws. The shareholders of every corporation control its legal ownership as seen with stock shares. All shareholders normally participate in the election of a board of directors tasked with running and managing the corporation.
The officers including the president, treasurer, and secretary are then elected by the board of directors who give them the authority to direct the daily business activities of the corporation. A single individual is permitted in many states, to occupy all the corporate offices while serving as the sole director.
C or Business Corporations
The limited liability corporations provide to its shareholders, directors and officers (principals) an ideal tool for the protection of assets. Corporate principals are not personally exposed to risks of contract breaches, corporate debts, or injuries caused by the corporation, agents or employees to third parties.
The liability of corporations’ even when responsible limits creditors to the pursuit of strictly corporate assets to compensate claims: corporate principals’ assets are not subjected to seizure or claim for corporate debts. The clear difference between corporations and the other entities like trusts or partnerships is the personal liability protection it provides to its corporate principals.
Additionally, the availability of a corporation’s liability protection depends on whether the corporation is carried as a distinct and separate entity in clear isolation from its individual officers or shareholders.
Creditors often resort to trying to prove that corporations are not functioning as distinct and separate business entities especially when they seem to possess no significant assets. They can attempt to highlight the fact that the corporation is just the alter ego of its shareholders or officers – this strategy is known as piercing the corporate veil. It provides the creditor with extended reach to the assets of corporate principals when successfully proven.
S corporations and C corporations are similar with the exception of it being qualified for IRS special tax election that allows taxing at just the level of shareholders with business corporate profits. In addition to affording the liability protection applied in C corporations, there are other required qualifications for S corporations relating to shareholder numbers and types, profit and loss allocation between shareholders, and the stock types issued by the company to investors.
Limited Liability Corporations (LLC)
This new entity affords liability protection similar to that offered by C corporations to corporate principals in addition to the tax treatment (pass-through) of S corporations without LLC associated restrictions and formalities. It evolved from the introduction of additional formalities on S corporations.
A general partnership describes an association between two or more persons in agreement to perform the activities of a business together. Partnership agreements can be oral or written. As a tool for the protection of assets, the usefulness general partnership is minimal since every partner is individually susceptible to liability for all partnership debts without excluding those incurred on behalf of the partnership by other partners.
Partners have the ability to account actions on behalf of the others with or without their consent.
This unlimited liability feature directly contrasts what is enjoyed by corporation owners (limited liability.) In addition to being liable for contracts negotiated by other partners, every partner is exposed to the risk offered by the negligence of the others. Also, partners are individually liable for whole amounts of partnership obligations.
Authorized by state law, a limited partnership (LP) is comprised of at least a general partner and a limited partner or more. Though there must be at least two legal entities, a single person can represent both the general and limited partners like the same person or corporation can be both the general and the limited partner.
The responsibility of managing the affairs of the partnership is on the shoulders of the general partner whose personal liability for partnership obligations and debts is always unlimited.
Limited partners in limited partnerships are not susceptible to personal liability for the obligations and debts of the partnership which exclude their contributions. Limited partners exercise little or no control in the daily management of the partnership so as to afford this protection.
Assuming an active management role can lead to a limited partner losing his/her limited protection from liability and changing status to a general partner. The value of shares for limited partnership is highly diminished, thanks to this restricted control and contribution in the management of the partnership business.
A trust is a document between the trust creator (known as the settler, grantor or trustor) and the person tasked with the responsibility of managing the assets inside a trust called the trustee. Trusts beneficiaries are people or institutions who will receive some or all benefits from the trust.
The trust document spells out the rules regarding assets held in the trust. Trusts are designed to protect assets inside the trust and reduce estate tax liabilities.
Once an asset goes inside a trust, it takes a new identity. Trusts certify the transfer of certain assets from the grantor to the trustee, allowed to hold and manage the trust assets for someone else’s benefit (the beneficiary). It now has the immunity from estate taxes and resistance to probate.
When a trust is created in the lifetime of the grantor, it is known as a living trust, while a testamentary trust refers to trusts created at the grantor’s death or through a will or living trust.
There are basically two basic types of trusts: revocable and irrevocable. The grantor in a revocable trust reserves the right to amend the trust with alterations or revoke it through the dissolution of a part/the entire trust. In an irrevocable trust, the grantor reserves no such right. This lack of control makes the irrevocable trust an incredibly powerful tool for asset-protection. It is impossible to get sued for assets you don’t own or control anymore.