Limited liability companies (LLCs) came into the focus of American business people in the late 1970s. Prior to that, most business entities were limited to the sole proprietor, partnership or corporate structures. European companies were the first to enjoy a business structure that limited the liability of the partners who held ownership interest in a company, and later Latin American business enterprises adopted and expanded the concept to include individuals who were interested in protecting their assets from creditors, court litigants and overburdening taxation.
The use of an LLC as an asset protection strategy was first noticed in Panama, a country where wealthy families were often at the mercy of frivolous lawsuits and questionable attempts by the government to relieve them of their holdings. Then there was the issue of personal liability, whereby the reckless behavior of business partners in their personal lives threatened the financial integrity of companies. The first LLC structures were filed in Wyoming and Florida, and by the late 1980s the Internal Revenue Service had recognized them for the purpose of taxation at the federal level.
It is estimated that for every stock corporation formed in the United States these days, two LLC filings are being tendered. While the majority of these filings are for a commercial purpose, many LLCs are being organized for the purpose of protecting different types of assets, including fine jewelry, luxury watches and other personal items.
The Concept Behind LLC Asset Protection
In business law, the legal concept of limited liability establishes that an enterprise organized as an LLC cannot be subject to liability imposed by the transgressions of the members who hold ownership interest in the company. It is possible for an LLC to be formed with a sole partner who holds 100 percent interest and manages the company as well; in fact, the sole proprietorship business structure has fallen out of favor among “one-man shops” due to the popularity and sheer advantages of the LLC. The idea is that the business enterprise can survive even if the partners or members assume heavy debt burdens and end up being chased and sued by creditors.
The way LLC asset protection works is that members are allowed to transfer ownership of real and personal property to the LLC, while continuing to make use of the property as they see fit. A primary residence or a vacation home, for example, can be listed as an asset of the LLC and thus placing a lien against it will not be an easy endeavor, nor will be seizure. A similar situation applies to personal property like fine jewelry, expensive watches, antiques, and other valuable items.
LLC Precautions
An LLC that is actively doing business can be subject to litigation. When a lawsuit is filed against the LLC, the plaintiff can go after the company’s assets, regardless of who originally transferred them to the company or who happens to be enjoying them. This means that if three individuals who are members of an LLC each transferred an investment home to the company, a plaintiff can sue the LLC and go after all three homes at once.
In some states, creditors can go after the membership interest in an LLC, thereby gaining access to the assets during bankruptcy or foreclosure proceedings.
Forming an LLC for the purpose of asset protection is a strategy that has been tested in many jurisdictions, but not in all of them. The statutes in some states explicitly prohibit the formation of an LLC for the purpose of asset protection, and thus it is always recommended to contact an attorney for any questions related to these matters.
Author Tanya Peterson resides in NYC and is a jewelry appraiser for watchrepairny.com, a Manhattan provider of fine watch repair services since 1978. Tanya’s grandfather was in the antique watch business and it’s been a fascination with her since childhood.
