Most successful business owners work hard for many years to build a company that provides for the well-being of themselves, their families, and their employees. But what happens after that? As a business owner, it’s important that you take steps to protect the assets your business has created against potential claims of creditors and other third parties, and that effort should begin well before your planned retirement.
In fact, it should begin very early, with the selection of the right type of business entity. The best type of entity for any individual business is dependent to some extent on the type of work it does, says Jamie Hopkins, assistant professor of taxation at The American College of Financial Services. For example, partnership is not the best choice for some businesses because liability passes on to the individual partners. “As such, incorporating as an LLC (limited liability corporation) or a C corporation may provide higher levels of personal asset protection,” he says. “However, it does not always add any more business asset protection.” The choice of business entity is also influenced by state laws, which can tilt the balance of power between asset holders and creditors, so it’s important to work with a professional familiar with those laws in your state, he adds.
Business owners should also tread carefully in this area, warns Peter Kravitz, chair of the corporate fiduciary and restructuring practice at Province, a consulting firm specializing in financial advisory, corporate reorganization, and trustee-related services. “Asset protection is really an obsolete term,” he says. “I prefer wealth management.” Kravitz is wary of the term ‘asset protection’ because it might suggest suspect motives on the part of the business owner in certain situations, such as a bankruptcy or a legitimate inter-generational transfer of assets.
Obtaining sound legal advice is critical in formulating an effective asset protection—or wealth management—strategy, but skimping on good legal representation is a mistake Bobby Harris, president and CEO of BlueGrace Logistics, a fast-growing transportation management company, sees too many of his peers make. “You can’t put a price on a great attorney and their legal advice. Sound legal advice is paramount to any business owner,” he says.
Many business owners plan to rely on an income stream from their former company in retirement, but there is some risk involved with that strategy. If performance weakens for any reason, that income stream could be substantially reduced or even eliminated, says George Menden, founding partner of MendenFreiman LLP, a legal firm specializing in estate planning. Thoughtful business, estate, and retirement planning should include consideration of all available defensive strategies, such as trusts, annuities, corporate entity type, qualified retirement plans, portfolio diversification, and more.
Two strategies in particular are frequently mentioned by asset protection specialists as being very valuable to business owners: LLCs and irrevocable trusts. “An LLC gives the individual (business owner) corporate protections from creditors, while at the same time the business is taxed like an individual,” says John Amorison, a bankruptcy attorney. If you own your building, the land it’s on, and/or any other commercial real estate, it may make sense to place each of those holdings into its own LLC, separate from the business itself. The first LLC that you create for your business can act as a holding company for the others, he suggests. Of course, that strategy would not make sense in all situations, so you should seek advice from a qualified expert before pursuing it.
Irrevocable trusts also offer strong protection for assets against creditors, but it’s important to note that putting assets into an irrevocable trust requires you to cede control of them to an independent trustee, Amorison adds. Obviously, the choices you make about which assets to place in an irrevocable trust and the trustees who will control it are very important.
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