The issue of how to protect assets, in a variety of circumstances, is one which we deal with daily for our clients. Most have accumulated a valuable nest-egg, often consisting of equity in their home and perhaps some savings, other investments and sometimes a business or a professional practice.
The particular concerns about protecting assets, as expressed by our clients, are based on the belief that a successful business owner is an attractive and visible target for lawsuits from a variety of sources. Employees, competitors, business associates and government agencies all present possible sources of legal liability, Bank lines of credit, personal guarantees on loans and leases, and possible downturns in business represent more specific, identifiable dangers. Owners of investment real estate recognize that liability from injuries on the property or disputes with tenants, buyers and sellers create the potential for lawsuits and the risk of loss.
Protecting assets, in the context of an ongoing business or professional practice generally involves an analysis at several levels.
PROTECTING ASSETS OF A BUSINESS
First, how do we make sure that the business operates with the least amount of liability exposure for both business and personal assets? That means, what entity will minimize liability and how should the operating entity be structured and capitalized? Depending on the sources and extent of risk, multiple entities may be effective in isolating particular liabilities from each other and insulating specific assets from those sources of risk. Sometimes the laws of different domestic or overseas jurisdictions widen the available opportunities for protecting assets of the business, including surplus cash, accounts receivable, and intellectual property.
PROTECTING PERSONAL ASSETS FROM LAWSUITS
Second, how do we protect assets from the personal liability that may be generated from the business or other causes. Sometimes, the choice of entity alone will not reduce personal exposure to business risks. Those with a professional practice, such as physicians, architects and lawyers, generally retain personal liability for malpractice regardless of the form of entity which they use. The choice of entity also may not minimize personal exposure if the entity is disregarded by the courts for failure to adhere to formalities, if it is considered the alter ego of the owner. Courts may also disregard the corporate or LLC veil if they consider it inequitable to do so or if it would produce an unfair result for the plaintiff in a case. These uncertain and subjective standards means that a high degree of risk to personal assets is often present regardless of the mere choice of business entity which is intended to limit personal liability,
The question of how to protect assets, including business and personal assets, must be evaluated in light of achieving proper business structuring as well as shielding personal wealth from individual liability. The topics in the Asset Protection Library detail the strategies and the key considerations employed in developing a plan to protect assets for our clients.
WHAT IS A LIMITED PARTNERSHIP
A limited partnership is distinguished legally from a general partnership. The unlimited liability feature of general partnerships is a serious impediment to conducting business using a partnership format. To mitigate the harsh impact of these rules, every state has enacted legislation allowing the formation of a type of partnership known as a limited partnership. Limited partnerships often play a key role in asset protection because assets in a limited partnership may be protected from creditor claims against a particular partner.
A limited partnership consists of one or more general partners and one or more limited partners. The same person can be both a general partner and a limited partner, as long as there are at least two legal persons who are partners in the partnership. The general partner is responsible for the management of the affairs of the partnership, and he has unlimited personal liability for all debts and obligations.
Limited partners have no personal liability. The limited partner stands to lose only the amount which he has contributed and any amounts which he has obligated himself to contribute under the terms of the partnership agreement. Limited partnerships are often used as investment vehicles for large projects requiring a considerable amount of cash. Individual limited partners contributing money to a venture, but not having management powers, will not have any personal liability for the debts of the business.
In exchange for this protection against personal liability, a limited partner may not actively participate in management. However, it is permissible for a limited partner to have a vote on certain matters, just as a shareholder has a right to vote on some corporate matters. A typical limited partnership agreement may provide that a majority vote of the limited partners is necessary for the sale of assets or to remove a general partner. The partnership agreement determines whether the limited partners can vote on these matters.
If a limited partner assumes an active role in management, that partner may lose his limited liability protection and may be treated as a general partner. For instance, if a limited partner negotiates a contract with a third party on behalf of the partnership, the limited partner may have liability as a general partner. For this reason, a limited partner’s activities must be carefully circumscribed.
Limited partnerships have always been used for real estate and tax shelter investments in order to pass the tax deductions through to the individual investors. These losses are then used by the partner to offset other income he might have. Although the Tax Reform Act of 1986 limits the ability to immediately deduct losses from “passive activities” to offset wages or investment income, the partnership format may still be desirable if the circumstances of the individual partner are such that he is able to take advantage of these losses.
Free Initial Consultation with an Asset Protection Lawyer
When you need help to protect your assets, call Ascent Law for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506