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Asset Protection Strategies

There are various ways to structure your holdings to protect them. The common theme is the use of multiple entities.

Three Kinds Of Entities

The three basic kinds of entities with which to structure your affairs are:

  • Operating entities,
  • Asset holding entities, and
  • Equity holding entities.

Let us explore the difference between using one entity and using multiple entities in a business structure, with some simple examples.

Example 1

Everything Held All In One Entity

In this example the affairs are structured the way many businesses are structured. Sally has her business in a corporation. The corporation owns its building outright. In this example, the same corporation is:

  1. Operating the business,
  2. Holding title to the asset, and
  3. Holding the equity in the asset.

If the corporation were to lose a lawsuit, the building is 100% at risk.

Example 2

Equity Mortgaged

Let us take the same facts as Example 1, only with a mortgage against the building for 100% of its market value. In this instance, the corporation has no equity in the building; the mortgage holder has it all.

If the corporation were to lose a lawsuit, the building is protected. The plaintiff would have nothing to gain by taking the building because there is no equity in it that is available to satisfy the judgment. Even if the suit were because of an accident involving the building, the mortgage holder is not at risk because it does not own the building itself, only the equity in it.

Example 3

Equity Held In Separate Entity

Let us take the same facts as Example 1, only instead of having a mortgage against the building, as in Example 2, Sally puts the equity into a separate entity that she controls. As in Example 2, the operating corporation has no equity in the building; the equity holding entity has it all.

If the corporation were to lose a lawsuit, the building is protected. Even if the suit were because of an accident involving the building, just like the mortgage holder was protected in Example 2, Sally's equity holding entity is not at risk because it does not own the building itself, only the equity in it.

Intangible Holding Entities

Separate entities for intangibles make great business sense for most businesses. Keeping trademarks, tradenames, copyrights, patents, and even domain name ownership separate from the operating entities can protect them from lawsuits.

For example, the most valuable asset the Coca‑Cola Company owns is the trade name. Your intangibles could also become valuable some day, and might even be valuable already. Why keep them in your operating entity and expose them to risk?

Get a Quote

Jerry can help you develop and manage an entity structure for your affairs that best minimizes your risks.

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