Asset Protection 101

The first issue to address is protecting your personal assets (versus your business assets) from potential creditors. This can be done via a Limited Liability Company (“LLC”) or Corporate Entity. The LLC/Corporate Entity will protect you from “inside liability”,ie, liability resulting from wrongs committed by your agents or employees during the scope of their employment. It will not protect you from “outside liability”, ie, liability resulting from wrongs committed by you outside the scope of your business (an example would be hitting a bicyclist with your car on a Sunday morning drive to church).

Further, the Court can “pierce the corporate veil” if it finds fraud, inadequate capitalization or a disregard of corporate formalities such that the corporate entity is merely an alter ego of you as an individual ( failure to keep corporate minutes, failure to keep or honor corporate bylaws, failure to file tax returns, failure to separate personal assets from business assets, paying personal expenses from corporate account, failure to have entity be an independent profit center, complete donination and control of entity, failure to file required reports with state, failure to pay entity taxes). If and when a Court pierces the corporate veil, it can allow a creditor to levy against the personal assets of the shareholders of a corporation.

Further, a Court can allow a creditor to levy on your personal assets if you were the one who committed the wrong.

Thus, to protect against piercing the corporate veil and outside liability, usually a General Liability insurance policy is procured by you as an individual.

If you wanted to get fancier with more protection, you could transfer your shares in the corporation to a domestic irrevocable trust, of which you would be the beneficiary . Thus in the event the corporate veil is pierced, the judgment would be against the trust versus you the individual. Since it would be a simple trust (versus a “complex” trust) there would be no assets in the trust as they would have to be distributed to the beneficiary on a annual basis. You could further move the trust which hold the shares to a foreign jurisdiction which does either does not recognize US judgments or where the burden of proof is much higher, thus converting your domestic trust to a foreign trust and making it exponentially more difficult for a creditor to levy upon your personal non exempt assets.

Obviously, all the above referenced machinations should be done under the supervision of licensed counsel in your jurisdiction.