Entity Formation as a Form of Asset Protection.

Yesterday I posted about umbrella liability insurance policies as being a good start towards a complete asset protection strategy. Today's post deals with entity formation as another measure of asset protection.

The most commonly used entity formations including corporations, limited partnerships and limited liability companies. Entity formation can offer some degree of asset protection. 

A corporation can protect personal assets from a business liability. Personal assets of a shareholder in a corporation are not subject to liabilities arising from the corporation. However, for many small business owners who form corporations, the business owner still signs contracts, loans and other documents stating that he or she will be personally liable if the corporation cannot absorb the liability.

A limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more limited partners. The asset protection features of a limited partnership include protection of limited partners from liability for the business. The general partner remains liable. Also, creditors may be restricted from touching the partnership assets for a debt of a limited partner. The creditor can only stand in the shoes of the limited partner and receive whatever distributions a limited partner is entitled to receive. The creditor puts him or herself at risk because it can be liable for income taxes on the partnership income even though no distributions have been made. A limited partnership agreement must be properly drafted to afford this type of asset protection.

A limited liability company is very similar to a limited partnership except that there is no general partner and all members have limited liability. The type of asset protection offered is similar to that of a limited partnership. The major difference is that a general partnership in a limited partnership is personally liable. A limited liability company has a different taxation structure so to consider forming this type of entity, taxation matters should be considered.