Asset Protection Introduction For Small Business Owners

This article is intended for every small business owner/entrepreneur who left behind Corporate America for the opportunity and dream of starting their own business.

This entrepreneurial spirit is what made this country what it is today.  However, this dream could be shattered very quickly without taking into consideration adequate asset protection plan.  The notes below were prepared by a lawyer in Florida.


Before we can continue, we need to define what asset protection is.  In very simple terms asset protection is the protection of assets from creditors.  In fact asset protection is part of a bigger concept of risk management.  Risk management is planning that seeks to protect business owners from potential future losses (i.e., avoid liability).  Unfortunately today most small business owners are not structuring or operating their businesses to avoid liability.  Thus, the primary goal of asset protection is to allow business owners to protect themselves from creditors’ claims while retaining a substantial, if not all, portion of their assets.

This article will briefly discuss four different areas of asset protection: (1) – protection from personal and business creditors; (2) – the most common corporate entities for protection: (3) – the operational and holding entities concept; and (4) –  exempt personal assets in Florida.

Please remember that in no way should asset protection planning ever aid in protecting criminal activity.  Asset protection involves implementing a plan to legally protect wealth.  Please also note the use of asset protection planning is subject to the Uniform Fraudulent Transfer Act that was incorporated in Chapter 726 of the Florida Statutes and other states rules that are applicable.  It is important that you seek the assistance of an attorney before seeking any kind of asset protection plan.

Separating your personal creditors from your business creditors.  It is very important that you separate your personal creditors from your business creditors.  Personal creditors are creditors for which you are “personally” responsible for, whether from a debt or a judgment.  This means you will need to satisfy any debt or judgment with your personal assets rather than business assets.  On the other hand, business creditors are creditors for which your “business entity” is responsible for, whether from a debt or a judgment.  Thus, assets placed within the business entity are vulnerable to the business creditors, but protected, for the most part, from the owner’s personal creditors.  Likewise, assets kept outside of the business entity are vulnerable to the owner’s personal creditors, but protected from the business’ creditors.

The majority of small business owners mistakenly believe that assets within a business entity are not subject to any type of liability.  However, remember that your business entity, if a corporation or a Limited Liability Company is a separate “legal person” from you and is subject to liability from vendors, clients, employees and others.  Likewise, assets within your corporate entity are only shielded from liability from your personal creditors.  Regardless of this limited protection it is important that you at least separate these two kinds of creditors.  It is important that as a small business owner you conduct business as a separate business entity.  It is equally important that you follow all the business entity formalities and avoid commingling funds.  If you conduct business as a separate business entity, in a correct and formal matter, then you can achieve the first level of asset protection which is the separation of your personal from business creditors.  You could significantly reduce the pool of assets available to creditors when you separate your personal from business creditors.

Choosing the proper business entity.  There are various possible business entities options for your small business.  However, most small business owners should opt to form the business as a Limited Liability Company (“LLC”) or a Corporation (either a “C” or an “S” Corporation).  The reason is very simple, for most small business owners the LLC or Corporation offer far superior liability protection than other business entities such as partnerships or sole proprietorships.  Yet, the LLC and Corporation are different from each other.

Both the LLC and Corporation offer limited liability protection for the owners.  However, usually the LLC, rather than the Corporation, is a better option for the small business owner.  This is because the statute that governs the operation of Corporations is more complex and burdensome than what is imposed to LLC when it comes to “corporate formalities”.  The rules regarding directors, officers, meetings, etc. are stricter for Corporations than for LLCs.  These stricter rules are really detrimental to small business owners that are preoccupied trying to run a successful business and basically performing as a “jack of all trades”.  Please note that the failure to comply with the applicable formalities could allow a court to “pierce the corporate veil”.  Thus, from an asset protection point of view the small business owners will most likely form an LLC rather than a Corporation because of the less stricter “corporate formalities” that LLCs offer.  A court will then be less willing to “pierce the corporate veil” and exposing the small business owners to unlimited liability for personal and business creditors with a Limited Liability Company.  In addition, you will see below how useful an LLC is in more complex asset protection structures.

But please remember that asset protection planning is just one area of your overall risk and business strategy.  There are other areas where a corporate structure is more beneficial than an LLC structure.  Thus, it is important to consult with an attorney first before deciding what type of business entity to create.  An attorney will let you know the pros and cons of each business entity and the consequences of switching from one business entity to another.

Separating Operating and Holding Entities.  We have discussed so far that it is important to separate your personal and business creditors.  You can do that by creating the appropriate business entity and following the appropriate formalities.  In addition, we discussed that for the most part a Limited Liability Company will be the entity of choice for small business owners.  However, you should consult with an attorney before creating an LLC or converting your current business entity to an LLC because of all the other ramifications (i.e., tax, etc) besides asset protection that are important to every small business owner.

Now we will discuss a more complex asset protection structure, including the creation of operating and holding entities.  Again, we discussed so far that assets placed within the businesses entity are vulnerable to the business creditors, but protected, for the most part, from the owner’s personal creditors.  In addition, assets kept outside of the business entity are vulnerable to the owner’s personal creditors, but protected from the business’s creditors.  So, can we further isolate creditors from our business entity?  The answer is yes, with the proper funding and structuring of the business.

You accomplish this by creating an operating entity, which has possession of the assets, but does not own the assets (unless encumbered in favor of the holding entity), and a holding entity, which actually owns the business’ assets.  With this structure, the small business owner can eliminate, or at the very least substantially limit, liability for both the personal and business debts.

In summary, the operating entity conducts all of the business’s activities and, thus, bears all the risk of loss.  The operating entity liability is limited because the operating entity contains a limited amount of assets.  The holding entity holds the majority of the assets but it is not responsible for the operating entity’s debts.  This strategy is more effective when done with LLCs rather with Corporations or other business entities because of the “charging orders” limitations in Florida.

The holding entity is where the majority of the assets of the business are located.  But because the holding company conducts no business activities, it has almost no exposure to liability, and therefore these assets are protected.  Thus, the business most valuable assets should be owned by the holding entity who then leases these assets (i.e., warehouse, equipment, etc) to the operating company, who then provides a way of taking vulnerable cash out of the operating entity in the form of lease payments.  In addition, the holding entity can loan money to the operating entity to buy assets, after which it would secure the loan with liens that run to the holding entity.  This strategy is even more important when assets carry an especially high risk of injury.

When done properly this structure could help in isolating creditors.  However, it very important that the proper formalities and structure are followed to avoid successful court challenges.  Again, you should consult with an attorney to avoid the pitfalls of improper structure.

Exempt Assets.  A good rule of thumb is to never, whenever possible, transfer exempt assets to a business entity.  This is because exempted property is considered unreachable by your creditors.  However, asset exemptions are available only to “natural persons” and not to business entities.  Thus, these assets inside a business entity are fully subject to the claims of business creditors.

Every state has a list of exempt assets.  For example, Florida has over thirty (30) separate exemptions.  The most popular being the homestead exemption.  The Florida Constitution provides that the homestead of a natural person is exempt from a forced sale or seizure by a creditor.  In order to qualify for the homestead exemption, the property, located in Florida, must serve as a residence of the owner or his family.  There are some rules that you should consider in relation to size, liens and bankruptcy law but for the most part this is the general rules for homestead property in Florida.

As a general rule, in states like Florida where the homestead is “unlimited”, ideally, you should pay-off your mortgages and other liens secured by the property.  You should do this because the cash used, non-exempt for asset protection purposes, to make the payments will be converted to exempt property by reducing the mortgages and liens encumbering the homestead.

For example, assume John Doe, a Florida resident, owns a home in Florida worth $400,000 that is subject to a $250,000 mortgage.  John’s homestead protection of $400,000 is ineffective against the $250,000 mortgage.  A mortagee can foreclose your homestead to collect the unpaid mortgage.  Now, let assume John Doe has $250,000 in cash.  Cash is a non-exempt asset and is subject to your creditors.  If John Doe can afford paying off the $250,000 mortgage with the cash he will effectively convert a non-exempt asset (cash) to an exempt asset.  First, John eliminates the $250,000 encumbrance in the homestead.  Second, the cash ($250,000) is now unavailable to his creditors.

Effective Asset Protection.  Asset protection planning is meant for the worst-case scenario.  It is important that as a small business owner you take asset protection seriously.  small business owners lack the unlimited resources of big corporations and even the smallest of the judgment could wreck the dreams and limited resources of the small business owner.

It is important also that your asset protection plan offers flexibility.  Most asset protection plans are meant to last for a long time.  Inevitably changes in the law and your factual situation (i.e., divorce) will occur.  Also, in developing an asset protection strategy there should be an answer for “What if this happens?” and “How my plan protects me against X or Y?”

The final goal of asset protection planning is cost efficiency.  We only discussed the tip of the iceberg is asset protection planning.  There are more complex plans that are beyond the scope of this article (i.e., offshore trust, etc).  A cost effective plan will increase the possibility of a well maintained plan that would translate in a more effective plan.

Finally, you should have your asset protection plan in advance of any legal difficulty.  The poorest candidate for planning is the small business owner in the midst of a crisis.  Even here, however, steps can be taken, albeit cautiously, to protect assets.  It is very important in situation like this one you should seek the advice of an attorney.

This is a four parts article and it is intended for every small business owner/entrepreneur who left behind Corporate America for the opportunity and dream of starting their own business.  This entrepreneurial spirit is what made this country what it is today.  However, this dream could be shattered very quickly without taking into consideration adequate asset protection plan.

Before we can continue, we need to define what asset protection is.  In very simple terms asset protection is the protection of assets from creditors.  In fact asset protection is part of a bigger concept of risk management.  Risk management is planning that seeks to protect business owners from potential future losses (i.e., avoid liability).  Unfortunately today most small business owners are not structuring or operating their businesses to avoid liability.  Thus, the primary goal of asset protection is to allow business owners to protect themselves from creditors’ claims while retaining a substantial, if not all, portion of their assets.

This article will briefly discuss four different areas of asset protection: (1) – protection from personal and business creditors; (2) – the most common corporate entities for protection: (3) – the operational and holding entities concept; and (4) –  exempt personal assets in Florida.

Please remember that in no way should asset protection planning ever aid in protecting criminal activity.  Asset protection involves implementing a plan to legally protect wealth.  Please also note the use of asset protection planning is subject to the Uniform Fraudulent Transfer Act that was incorporated in Chapter 726 of the Florida Statutes.  It is important that you seek the assistance of an attorney before seeking any kind of asset protection plan.

Separating your personal creditors from your business creditors.  It is very important that you separate your personal creditors from your business creditors.  Personal creditors are creditors for which you are “personally” responsible for, whether from a debt or a judgment.  This means you will need to satisfy any debt or judgment with your personal assets rather than business assets.  On the other hand, business creditors are creditors for which your “business entity” is responsible for, whether from a debt or a judgment.  Thus, assets placed within the business entity are vulnerable to the business creditors, but protected, for the most part, from the owner’s personal creditors.  Likewise, assets kept outside of the business entity are vulnerable to the owner’s personal creditors, but protected from the business’ creditors.

The majority of small business owners mistakenly believe that assets within a business entity are not subject to any type of liability.  However, remember that your business entity, if a corporation or a Limited Liability Company is a separate “legal person” from you and is subject to liability from vendors, clients, employees and others.  Likewise, assets within your corporate entity are only shielded from liability from your personal creditors.  Regardless of this limited protection it is important that you at least separate these two kinds of creditors.  It is important that as a small business owner you conduct business as a separate business entity.  It is equally important that you follow all the business entity formalities and avoid commingling funds.  If you conduct business as a separate business entity, in a correct and formal matter, then you can achieve the first level of asset protection which is the separation of your personal from business creditors.  You could significantly reduce the pool of assets available to creditors when you separate your personal from business creditors.

Choosing the proper business entity.  There are various possible business entities options for your small business.  However, most small business owners should opt to form the business as a Limited Liability Company (“LLC”) or a Corporation (either a “C” or an “S” Corporation).  The reason is very simple, for most small business owners the LLC or Corporation offer far superior liability protection than other business entities such as partnerships or sole proprietorships.  Yet, the LLC and Corporation are different from each other.

Both the LLC and Corporation offer limited liability protection for the owners.  However, usually the LLC, rather than the Corporation, is a better option for the small business owner.  This is because the statute that governs the operation of Corporations is more complex and burdensome than what is imposed to LLC when it comes to “corporate formalities”.  The rules regarding directors, officers, meetings, etc. are stricter for Corporations than for LLCs.  These stricter rules are really detrimental to small business owners that are preoccupied trying to run a successful business and basically performing as a “jack of all trades”.  Please note that the failure to comply with the applicable formalities could allow a court to “pierce the corporate veil”.  Thus, from an asset protection point of view the small business owners will most likely form an LLC rather than a Corporation because of the less stricter “corporate formalities” that LLCs offer.  A court will then be less willing to “pierce the corporate veil” and exposing the small business owners to unlimited liability for personal and business creditors with a Limited Liability Company.  In addition, you will see below how useful an LLC is in more complex asset protection structures.

But please remember that asset protection planning is just one area of your overall risk and business strategy.  There are other areas where a corporate structure is more beneficial than an LLC structure.  Thus, it is important to consult with an attorney first before deciding what type of business entity to create.  An attorney will let you know the pros and cons of each business entity and the consequences of switching from one business entity to another.  

Separating Operating and Holding Entities.  We have discussed so far that it is important to separate your personal and business creditors.  You can do that by creating the appropriate business entity and following the appropriate formalities.  In addition, we discussed that for the most part a Limited Liability Company will be the entity of choice for small business owners.  However, you should consult with an attorney before creating an LLC or converting your current business entity to an LLC because of all the other ramifications (i.e., tax, etc) besides asset protection that are important to every small business owner.

Now we will discuss a more complex asset protection structure, including the creation of operating and holding entities.  Again, we discussed so far that assets placed within the businesses entity are vulnerable to the business creditors, but protected, for the most part, from the owner’s personal creditors.  In addition, assets kept outside of the business entity are vulnerable to the owner’s personal creditors, but protected from the business’s creditors.  So, can we further isolate creditors from our business entity?  The answer is yes, with the proper funding and structuring of the business.

You accomplish this by creating an operating entity, which has possession of the assets, but does not own the assets (unless encumbered in favor of the holding entity), and a holding entity, which actually owns the business’ assets.  With this structure, the small business owner can eliminate, or at the very least substantially limit, liability for both the personal and business debts.

In summary, the operating entity conducts all of the business’s activities and, thus, bears all the risk of loss.  The operating entity liability is limited because the operating entity contains a limited amount of assets.  The holding entity holds the majority of the assets but it is not responsible for the operating entity’s debts.  This strategy is more effective when done with LLCs rather with Corporations or other business entities because of the “charging orders” limitations in Florida.

The holding entity is where the majority of the assets of the business are located.  But because the holding company conducts no business activities, it has almost no exposure to liability, and therefore these assets are protected.  Thus, the business most valuable assets should be owned by the holding entity who then leases these assets (i.e., warehouse, equipment, etc) to the operating company, who then provides a way of taking vulnerable cash out of the operating entity in the form of lease payments.  In addition, the holding entity can loan money to the operating entity to buy assets, after which it would secure the loan with liens that run to the holding entity.  This strategy is even more important when assets carry an especially high risk of injury.

When done properly this structure could help in isolating creditors.  However, it very important that the proper formalities and structure are followed to avoid successful court challenges.  Again, you should consult with an attorney to avoid the pitfalls of improper structure.

Exempt Assets.  A good rule of thumb is to never, whenever possible, transfer exempt assets to a business entity.  This is because exempted property is considered unreachable by your creditors.  However, asset exemptions are available only to “natural persons” and not to business entities.  Thus, these assets inside a business entity are fully subject to the claims of business creditors.

Every state has a list of exempt assets.  For example, Florida has over thirty (30) separate exemptions.  The most popular being the homestead exemption.  The Florida Constitution provides that the homestead of a natural person is exempt from a forced sale or seizure by a creditor.  In order to qualify for the homestead exemption, the property, located in Florida, must serve as a residence of the owner or his family.  There are some rules that you should consider in relation to size, liens and bankruptcy law but for the most part this is the general rules for homestead property in Florida.

As a general rule, in states like Florida where the homestead is “unlimited”, ideally, you should pay-off your mortgages and other liens secured by the property.  You should do this because the cash used, non-exempt for asset protection purposes, to make the payments will be converted to exempt property by reducing the mortgages and liens encumbering the homestead.

For example, assume John Doe, a Florida resident, owns a home in Florida worth $400,000 that is subject to a $250,000 mortgage.  John’s homestead protection of $400,000 is ineffective against the $250,000 mortgage.  A mortagee can foreclose your homestead to collect the unpaid mortgage.  Now, let assume John Doe has $250,000 in cash.  Cash is a non-exempt asset and is subject to your creditors.  If John Doe can afford paying off the $250,000 mortgage with the cash he will effectively convert a non-exempt asset (cash) to an exempt asset.  First, John eliminates the $250,000 encumbrance in the homestead.  Second, the cash ($250,000) is now unavailable to his creditors.

Effective Asset Protection.  Asset protection planning is meant for the worst-case scenario.  It is important that as a small business owner you take asset protection seriously.  small business owners lack the unlimited resources of big corporations and even the smallest of the judgment could wreck the dreams and limited resources of the small business owner.

It is important also that your asset protection plan offers flexibility.  Most asset protection plans are meant to last for a long time.  Inevitably changes in the law and your factual situation (i.e., divorce) will occur.  Also, in developing an asset protection strategy there should be an answer for “What if this happens?” and “How my plan protects me against X or Y?”

The final goal of asset protection planning is cost efficiency.  We only discussed the tip of the iceberg is asset protection planning.  There are more complex plans that are beyond the scope of this article (i.e., offshore trust, etc).  A cost effective plan will increase the possibility of a well maintained plan that would translate in a more effective plan.

Finally, you should have your asset protection plan in advance of any legal difficulty.  The poorest candidate for planning is the small business owner in the midst of a crisis.  Even here, however, steps can be taken, albeit cautiously, to protect assets.  It is very important in situation like this one you should seek the advice of an attorney.

Call Connie Dello Buono for financial advisors and other experts 408-854-1883 motherhealth@gmail.com CA Life Lic 0G60621 for financial strategies, financial tools, opening exempt assets, risk protection and tax efficient ways of financial plan to serve your current and future finance needs. I work with team of estate planners, CPA, lawyers and insurance agents.

Published by

connie dello buono

Health educator, author and enterpreneur motherhealth@gmail.com or conniedbuono@gmail.com ; cell 408-854-1883 Helping families in the bay area by providing compassionate and live-in caregivers for homebound bay area seniors. Blogs at www.clubalthea.com Currently writing a self help and self cure ebook to help transform others in their journey to wellness, Healing within, transform inside and out. This is a compilation of topics Connie answered at quora.com and posts in this site.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.