Limited Liability Companies & Limited Partnerships

Limited liability companies and limited partnerships are frequently used in asset protection. Consider the following.

Any asset that you own (the asset is titled in your name or owned by you directly) can be seized by a creditor. For example, if you have an apartment building or a bank account, a creditor can seize those assets. Any asset that you do not own cannot be taken from you by a creditor. While that sounds like a simplistic statement, it lies at the heart and soul of asset protection planning.

Any asset that is owned by a legal entity is not owned by you, even if you own and control the legal entity. For example, if you own a share of General Motors, you have no ownership in GM’s assembly plant in Detroit. This concept applies to any legal entity, regardless of the percentage of the entity you own.

How does that benefit you? Once you transfer the ownership of an asset to a limited liability company or a limited partnership, you no longer own that asset. The asset is now owned by the LLC or the LP. All you own is an interest in this legal entity. So, why is it better to own an interest in a legal entity than to own the underlying asset directly?

Under the laws of all states, interests in limited liability companies and limited partnerships are protected by the so-called charging order protection. Pursuant to the charging order protection, a creditor cannot seize your interest in one of these entities. And if they cannot take your interest in the entity, they cannot get to the underlying assets. For a more in-depth study of charging orders, click here.

Note, corporations do not offer you any charging order protection. If you own a corporation, which in turn owns valuable assets, a creditor will be able to seize your corporate stock, and then get to the valuable assets. Corporations will only protect you from lawsuits directed against the corporation itself. If the lawsuit is directed against the shareholder, there is no protection. If you are seeking to protect assets from claims of creditors, forget about corporations. Look into forming a limited liability company or a limited partnership.

Assets that our clients commonly protect by using limited liability companies and limited partnerships include investment and income producing real estate, intellectual property, valuable businesses, corporations, art and collectibles, airplanes, and other valuables.

By appointing you as the manager of the LLC we allow you full control over your assets, without compromising asset protection. All entities are structured to be tax neutral – this means that there will be no tax consequences to you in setting up a limited liability company or a limited partnership. Most of the time, these entities can be structured so that they will not even have to file federal income tax returns. For state income tax purposes, there are usually no returns to file, but this requirement does vary from state to state and you should consult with your attorney or CPA.

Limited liability companies and limited partnerships are easy to set up, have nominal annual costs, and provide you with a tremendous level of asset protection.

Example: Dr. Brown owns Apartment Building 1 and Apartment Building 2. Building 1 is owned through a corporation and Building 2 is owned through a limited partnership. Assume that a tenant in each building slips and falls and files a lawsuit. Each tenant would have to sue the owner of the respective building, which means the corporation and the LLC. Each legal entity will protect Dr. Brown and prevent the lawsuits from reaching his personal assets. Great result.

Now assume that Dr. Brown runs over a pedestrian and is being sued personally. The plaintiff obtains a judgment against Dr. Brown and looks for Dr. Brown’s assets to pursue. What happens to the apartment buildings?

While the creditor would not be able to seize Building 1 directly, the creditor would be able to seize Dr. Brown’s corporate stock, then liquidate the corporation and get to Apartment Building 1. Not a good result.

With respect to Apartment Building 2, the creditor will not be able to get Dr. Brown’s interest in the LLC, and will not be able to get Apartment Building 2. Great result.