The best business structures for asset protection are limited liability companies—because of their inherent asset protection and flexibility—and corporations due to their more robust asset protection mechanisms.
Asset protection is a critical consideration for business owners looking to safeguard their personal assets from potential risks and liabilities. Learning more about each type of business entity structure is essential before choosing one for your business.
Sole Proprietorship
This is the simplest form of business structure where one individual owns and operates a business.
Asset protection considerations with a sole proprietorship include:
- Unlimited Personal Liability: The business owner is personally responsible for all business debts and obligations, putting personal assets at risk in the event of a lawsuit or financial trouble.
- No Separation: Personal and business assets are not distinct, making it easier for creditors to claim personal property for business debts.
Given these points, sole proprietorships are not recommended for those seeking asset protection strategies.
Partnerships
Partnerships consist of two or more individuals. They are structured as either general partnerships (GP) or limited partnerships (LP), each offering different levels of asset protection.
General Partnership (GP)
Asset protection considerations with a general partnership include:
- Unlimited Personal Liability for Partners: Each partner is personally liable for business debts and obligations, exposing their personal assets to risk.
- Joint Liability: Partners can be liable for co-partners’ actions, increasing personal risk.
Limited Partnership (LP)
Asset protection considerations with a limited partnership include:
- Limited Liability for Limited Partners: Limited partners are only liable up to the amount of their investment, protecting their personal assets from business debts. However, they can’t participate in daily operations.
- Unlimited Liability for the General Partner: The general partner in an LP retains unlimited personal liability, posing a significant risk.
While LPs offer some asset protection for limited partners, the general partner remains vulnerable, making it less ideal for complete asset protection.
Limited Liability Company (LLC)
A better business structure for asset protection is a limited liability company (LLC) because it provides liability protection along with flexibility.
Asset protection considerations with an LLC include:
- Limited Liability Protection: LLC members generally aren’t personally liable for business debts and obligations, safeguarding their personal assets against business-related risks.
- Separate Legal Entity: An LLC is recognized as a separate legal entity, which ensures that business liabilities don’t impact personal assets.
- Flexible Management Structure: LLCs offer flexibility in management, allowing members to actively manage the business without jeopardizing liability protection.
- Irregular Asset Transfers: If a court finds that a member transferred assets into the LLC to protect them from seizure, those assets can still be seized via a charging order.
- Consequences of Personal Actions: An LLC won’t protect individuals from personal actions that result in company liability.
- Piercing the Corporate Veil: Business finances must be kept separate from personal finances or it can result in losing liability protection, thus exposing owners to personal liability. For example, something as simple as using a business credit card to purchase gasoline for your personal vehicle can be classified as piercing the corporate veil and render the liability protection void.
S Corporation
An S corporation provides limited liability protection similar to an LLC but is subject to different operational and tax requirements. Refer to our guide entitled S Corp vs LLC – Which is the Right Entity for You for a more detailed explanation of the differences between these two business structures.
Asset protection considerations with an S corporation include:
- Limited Liability for Shareholders: Shareholders are protected from personal liability for business debts.
- Corporate Formalities: S corporations must adhere to strict corporate formalities and compliance requirements to maintain their liability protection.
- Piercing the Corporate Veil: Like LLCs, S corporations must not pierce the corporate veil.
While S corporations offer strong asset protection, they require diligent adherence to corporate regulations to maintain this protection.
C Corporation
A C corporation is a separate legal entity that offers the highest level of liability protection for its shareholders.
Asset protection considerations with a C corporation include:
- Limited Liability for Shareholders: Shareholders aren’t personally liable for the corporation’s debts and obligations, providing robust protection for personal assets.
- Perpetual Existence: The corporation’s continuous existence ensures ongoing asset protection regardless of changes in ownership or management.
- Corporate Veil: Like LLCs and S corporations, C corporations must adhere to strict regulations to maintain liability protection.
C corporations offer strong asset protection but come with increased complexity and regulatory requirements.
How to Choose the Right Business Structure for Asset Protection
Selecting the right business structure starts with forming an asset protection strategy and evaluating your specific asset protection needs, potential risks, and business goals. The insights shared in our Roads & Riches podcast are a great place to start if you’re just starting to look for business inspiration.
Once you’re close to launching, we recommend seeking advice from an experienced CPA specializing in asset protection planning and business structure consulting to ensure your chosen structure aligns with your business needs and goals.
Start by thinking about the following:
Assess Your Liability Needs: Determine how much personal liability protection you require. LLCs and corporations provide more asset protection than partnerships and sole proprietorships.
Consider Compliance Requirements: Understand the regulatory and formal requirements associated with each structure. Maintaining compliance is essential to preserving liability protection.
Key Considerations for Business Structure Selection
Choosing the best business structure for asset protection is vital for safeguarding your personal assets. An LLC is often the best option for most small businesses due to its comprehensive liability protection and operational flexibility. However, depending on your specific circumstances, other structures such as S corporations or C corporations may be more suitable.
Carefully assess your liability needs, consider the compliance requirements, and consult with professionals to make an informed decision. Implementing a well-structured asset protection plan can protect your assets and help to ensure your business’s long-term success.
Disclaimer: We recommend working with strong legal counsel when structuring your business. Our CPAs are always happy to collaborate with an attorney of your choice, or connect you with an attorney from our network that would fit your needs.
