Asset Protection with an LLC:  Moving to a Higher Level

Introduction: Basic LLC Asset Protection.

Many people are creating limited liability companies (LLC) for protection of their personal assets from creditors and lawsuits related to their businesses. The basic LLC is an effective asset protection device, provided that the operations of the LLC include the following essential features:

  1. A comprehensive LLC operating agreement which is adhered to by the member (owner).
  2. Accounting procedures to keep the owner’s personal assets separate from the business assets, and clear, timely, and accurate documentation of funds going into and out of the LLC.
  3. Operating procedures consistent with the LLC being a separate and valid business entity, such as signing contracts in the name of the LLC (rather than personally), and using a personal guarantee of the LLC’s obligation only as a last resort.

The above methods of operation for a LLC will help to protect the owners of the LLC from the creditors of the LLC. In Washington, the LLC statute provides that owners of an LLC receive the same protection from business creditors as shareholders of a corporation (RCW 25.15.060).

Higher Level Asset Protection.

The financial condition and business plan of the LLC should be examined on a regular basis. Ideally, this will happen at an annual meeting involving the owner, the accountant, and the attorney. As the LLC matures, consideration should be given to examining possible upgrades in the sophistication of the operation of the LLC. Some LLCs will have these higher level features from the start, but many owners want to keep the LLC organization simpler at the beginning, until they see how well the business does.

Higher level asset protection measures can protect the assets within the LLC (as opposed to personal assets outside the LLC) from lawsuits and creditors of the LLC. More sophisticated measures can even be utilized to protect the owner’s personal assets outside of the business which may be necessary for future operations of the LLC.

The following features can maximize the asset protection capabilities of the LLC or corporation:

  1. Documenting loans to the LLC, and filing security documents creating liens on the LLC assets, in order to give the owner a priority claim on the assets in case of failure of the LLC’s business.
  2. Documenting and implementing procedures for withdrawing cash from the LLC in the form of salaries and payments on promissory notes.
  3. Leasing assets (real property or personal property) from the owner to the LLC in order to protect the assets from creditors of the LLC.
  4. Creating a separate holding company to hold valuable assets, and then leasing those assets from the owner’s holding company to the LLC which carries on the business operations.

Some or all of the above measures may be appropriate for a business as it matures and is ready for more sophisticated asset protection.

Protection of Owner’s Non-Business Property.

The LLC owner may also benefit from a general review of asset protection for the owner’s personal property outside of the business, such as cash and personal investments. There are some very simple asset protection concepts which can be initiated quickly and easily to protect a business owner’s assets outside of the business. Of course, there are also more sophisticated personal asset protection systems which an owner may want to consider, depending on the owner’s personal finances.

Some simple and inexpensive asset protection concepts for personal assets not involved in a business include:

  1. Life insurance products which can be exempt from claims of creditors.
  2. Certain retirement plans which can be exempt from creditor claims.

Caution: Uniform Fraudulent Transfer Act (UFTA).

All methods of asset protection involving transfers of property between persons or entities are subject to the Uniform Fraudulent Transfer Act (in Washington, RCW 19.40). If this act is violated, the transfer can be set aside by creditors. UFTA should be carefully reviewed if a transferor is experiencing financial difficulties. If, however, asset protection planning and implementation is undertaken while the person or entity is financially sound, there should be no problem with the UFTA. Of course, many times this is a matter of degree, so careful judgment and documentation will be required in transfers.

Time for Asset Protection Planning and Implementation.

Asset protection planning is best undertaken when finances are sound, and the LLC owner is simply trying to build protection from creditors in the event of unforeseen circumstances. Asset protection planning must be customized to the particular individual, taking into consideration that person’s circumstances and desired level of protection. Most asset protection activities will involve increased documentation and some increased level of inconvenience.

Planning for the Individual’s Circumstances.

Each person will need to decide what level of protection would be appropriate for their circumstances. The best way to get started on this process is to arrange a consultation with a professional who is knowledgeable and experienced in these matters.