Does an individual’s asset protection planning also mean that his or her business is protected? The answer is no. Sorry, there simply is no silver bullet for everything.

If a business or professional practice owned by an individual is sued, it puts the assets of the business or professional practice at risk. Any personal-level asset protection planning he or she has in place will not protect the assets of the business or professional practice from the judgment creditors of the business or professional practice. It is really that simple.

In a recent article discussing the business planning protection compared to the individual level planning Barry S. Engel, John R. Garland, and Edward D. Brown listed various opportunities for planning purposes. I have provided some of their suggestions below.

Overview of Business Planning Techniques. The operating business or professional practice (hereinafter referred to as the “Company”) is often, by its very nature, a potential target of lawsuits and other legal process. A lawsuit may be brought, for example, by a customer or client, a supplier, a competitor, a governmental agency, or other third parties. Whether the Company is organized as a corporation, partnership, limited liability company or other recognized entity, it can find itself a defendant in a lawsuit, with its own assets exposed.
There are a number of ways to protect a Company’s assets with proper business planning. Here are brief descriptions of the relevant techniques:

1. The Company is divided into component parts. A Company’s enterprises may be created as, or later be divided into, multiple entities. As such, a particular operation of the overall business of the Company can be performed within a separate entity. Any liability risk associated with that separate entity’s operations will be limited to that separate entity’s assets. In that case, for example, a creditor of a separate operating entity would not have access to the assets held by another entity or entities, even if the entities have the same owners and related businesses.

2. The Company forms and funds subsidiary limited partnerships and/or limited liability companies. The Company can form one or more limited partnerships or limited liability companies (“LP/LLC”), and contribute assets to these new entities. A creditor of the owner of an LP/LLC will generally face restrictions in accessing the assets held in the LP/LLC.

3. The Company sells assets and then leases them back. An operating Company can sell valuable assets that it uses in its business to another entity or planning structure created by the Company owners, which in turn leases those assets back to the operating Company. As a result, the operating Company can continue to conduct its business, but if it is sued, its everyday tools of the trade will not be owned by it and thus will not be exposed to judgment creditors of the Company.

4. Equity stripping by the Company. Another strategy is to have the Company pledge its assets (e.g., equipment, accounts receivable, notes receivable, inventory, real estate) as collateral for a loan. The loan proceeds are then loaned to the business’s owners, who place them in a protected arrangement, such as in an LP/LLC or in an asset protection trust. In this way, there is less equity value in the Company that could otherwise be exposed to future creditors.

5. The Company distributes accumulated liquidity. One strategy that requires little explanation is to have the operating Company keep its cash on hand to a minimum and to frequently distribute to its owners liquid assets not needed for daily operations. If the Company is later threatened by an unforeseen claim or lawsuit, the Company will already have divested itself of assets, making it unlikely that the distributions could be viewed as fraudulent transfers.

As with any other type of asset protection planning, in order to avoid running afoul of applicable fraudulent transfer law, it is best undertaken when the Company has no claims pending, threatened or expected, and when there are no outstanding judgments of a material amount or nature. The fraudulent transfer laws of most states are based on the Uniform Fraudulent Transfer Act (“UFTA”), which protects present and subsequent—but not future potential—creditors against transfers made with the intent to hinder, delay, or defraud them.

The concepts summarized above, either alone or in combination, can help a Company’s owners protect the Company’s valuable assets and accordingly help the owners protect their investment of blood, sweat, tears and dollars in the Company. This type of planning can also help generate tremendous savings on annual premiums for liability coverage, whether in the nature of general liability coverage, malpractice coverage, or the like.

Business/Tax Law Issues