Eight Asset Protection Strategies For LLC Members

Author: NCH Internal Editorial Team
Reviewed by Cort W. Christie, MBA
Cort W. Christie, MBA is the Founder of Nevada Corporate Headquarters (NCH) and a nationally recognized entrepreneur, executive, author, and speaker. Mr. Christie has spent over 32 years helping business owners structure, protect, and scale their companies.

This article has been reviewed by Mr. Christie to ensure accuracy and value for today’s entrepreneurs. Jump to...

Asset protection is one of the greatest benefits of limited liability companies (LLCs). But as the name suggests, an LLC's liability protection has limitations.

Certain situations could expose you to liability. Fortunately, you can use other LLC asset protection strategies to build a multi-layered defense for your personal assets.

Below, we'll outline how you can strengthen your LLC's asset protection and explore the common pitfalls of an LLC's limited liability protection.

The Limitations of LLCs

LLCs are primarily popular due to the liability protections they offer. These protections shield their owners or LLC members from any liability or legal claims the company incurs.

For instance, if the LLC defaults on a business loan, the lender cannot go after the LLC members or their personal assets. They can only use the company's assets to repay the debt.

This shield is what makes LLCs primarily appealing to entrepreneurs. However, like everything else, it has its limitations.

There are certain situations where an LLC member can be held personally liable for the company, such as:

Piercing the Corporate Veil

Piercing the corporate veil refers to the legal concept that allows courts to disregard an LLC's limited liability. This phenomenon typically happens when the law finds that you failed to maintain a clear separation between you and your business.

For example, if you mix your business and personal finances, it gives the court a reason to believe you're only using your LLC as an alter ego.

The same rule applies if an LLC member is found guilty of fraud. If they made fraudulent representations or omissions while applying for a loan, they'll be liable for any harm they cause to the creditor.

Loan Guarantees

Some lenders require LLC members to guarantee the company's loan personally. This setup means you'll become liable for repaying the loan if the LLC defaults.

Pledging Property as Collateral

Besides personal guarantees, some lenders also ask members of new LLCs to pledge their properties as collateral for a loan. If the company can't repay its debts, they'll use the collateral to recover their losses.

Ultimately, LLCs are not impenetrable entities. The court could easily waive its limited liability protections, so building a multi-layered defense for your assets is better.

Eight Asset Protection Strategies For LLC Members

The great thing about asset protection is that it's a multi-faceted approach, not a one-size-fits-all solution. A comprehensive asset protection plan typically involves multiple strategies to create a layered shield over your hard-earned assets.

Some of the asset protection strategies LLC members typically use include:

1. Keeping your business and personal finances separate

One of the easiest ways to fortify your LLC's asset protection is to separate your business and personal finances.

This mistake is very common among small business owners. But as simple as it sounds, this error could easily expose your personal assets to liability.

Your LLC should have its own bank account and credit cards. Any contracts, invoices, purchase orders, and similar documents your LLC releases should have its name on them.

This way, everyone your LLC does business with will know they're dealing with an official entity.

2. Build your LLC's credit score

Lenders are less likely to ask for personal guarantees or collateral if the company applying for the loan has a high business credit score.

A strong score demonstrates an LLC's creditworthiness. It tells lenders that your company is a reliable borrower who can manage its finances properly.

The higher your LLC's score is, the better its chances of getting more favorable terms, such as lower interest rates and higher borrowing limits.

3. Get liability insurance

No business owner wants to get into an accident or make a costly mistake, but these things can and do happen.

During these incidents, liability insurance is your first defense against legal claims. It protects you and your LLC from any financial burden from lawsuits and debts.

Although premiums for companies can be expensive, carrying little to no insurance at all could devastate your LLC. So, take the time to analyze the risks and threats your company may face. This way, you can choose the right insurance company and policy.

4. Segregate your assets

Don't put all of your eggs in one basket. Instead, segregate your LLC's assets into different holding companies or trusts.

This asset protection strategy is especially useful for LLCs operating in high-risk industries where lawsuits are common.

5. Establish trusts

Trusts are legal arrangements that allow you to transfer your assets to one account.

You can establish two primary types of trusts: revocable and irrevocable. But out of the two, irrevocable trusts are generally considered the more effective vehicle for asset protection.

Unlike revocable trusts, which can be modified once established, you can't terminate or change the terms of an irrevocable trust. This feature strengthens their asset protection.

Once you create an irrevocable trust, you'll lose ownership of any asset you transfer to it. If a creditor tries to go after you, they cannot access the assets you've placed in the trust.

We highly recommend that you speak to a lawyer before establishing a trust. They can evaluate your assets and advise on properly structuring your trust.

6. Redirect revenue to specific assets

If your company consistently generates profit, you could redirect some of your revenue to specific assets like a primary residence or an account that offers some degree of protection from creditors.

Most states allow residents to place a homestead exemption on their primary residence within their jurisdiction. This helps homeowners minimize their taxes and protects their homes from creditors.

However, certain states have specific statutes for homestead exemptions. For example, Florida, Iowa, Kansas, Oklahoma, South Dakota, and Texas have provisions that protect 100% of the equity. This is if the homeowners follow their provisions properly.

7. Distribute your LLC's excess profits

High profits can be a double-edged sword. While you can reinvest your excess profits into the business, it could also put your company in a financially vulnerable position.

A lawsuit could wipe out your large cash reserve. That said, it's important to manage your excess profits properly.

Instead of reinvesting it into your company, you can distribute it among your members. However, it would be best if you did this strategy before a notice of a lawsuit arrives at your LLC's doorstep. If not, the transaction could be viewed as fraudulent by the court.

8. Elect your LLC as a corporation

The IRS considers LLCs pass-through entities by default. However, they can change their tax election to a C or S corporation.

Although changing your tax election to a corporation will cause double taxation, it can help you fortify your LLC's asset protection.

Importance of Seeking Professional Advice in Asset Protection

While it's true that you can create a comprehensive asset protection plan on your own, there's a reason why many well-known entrepreneurs seek legal counsel. Here's why:

Expertise & Experience

Asset protection laws and regulations can be complicated. They vary by state, so it would be better for you to work with someone with the expertise and experience to help you make informed decisions about your and your company's wealth.

Tailored Strategies

No estate is ever the same. Everyone's asset protection needs vary depending on their long-term goals, unique circumstances, and the size of the estate.

A legal advisor will assess your situation and help you develop a comprehensive asset protection plan tailored to your needs and goals.

Compliance with Federal & State Regulations

A legal advisor will help you ensure that each of the LLC asset protection strategies you plan on using complies with federal and state regulations.

Moreover, your asset protection plan should comply with fraudulent conveyance laws. These statutes are designed to prevent people from transferring assets after they incur debt.

They typically apply to strategies such as profit distribution. The timing and amount of profits you'll distribute must be reasonable. Your legal advisor will assist you in implementing your LLC's asset protection strategies before any legal claims arise.

Proactive Monitoring & Adjustment

Asset protection is not a one-time thing. It's an ongoing effort that constantly evolves.

Over time, your estate will grow, and your needs will change. The same thing can happen to asset protection laws and regulations. You must update your strategies to stay relevant and effective when these things change.

Your legal advisor will provide continuous support and closely monitor how your asset protection plan performs. This way, you can easily adjust your strategies according to your changing needs.

Strengthen Your LLC's Asset Protection

While the limited liability protection an LLC offers is valuable, business owners like you need to understand their limitations and take additional steps to safeguard your assets.

Like any other business entity, LLCs are still at risk of legal claims and other unforeseen circumstances like operational mistakes. If you rely only on your LLC's liability shield, these incidents could expose you to personal liability.

However, implementing a multi-faceted asset protection plan can help minimize risks and ensure that your LLC won't jeopardize your long-term financial stability.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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