Asset Protection

Does an LLC Offer Adequate Asset Protection?

By
Dominion
Updated:
October 6, 2023
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8 min read
Contents

One of the first things a new entrepreneur will do is set up a company that offers some level of legal protection, like an LLC. But while an LLC can be a highly effective business structure, it doesn't solve all your problems, particularly as you become more successful.

Say you accumulate tens of millions of dollars through your successful business ventures and strategies. As legal threats loom in your future, you might believe that your LLC offers adequate asset protection, safeguarding your personal assets against legal claims.

In fact, the opposite is usually true. Today, let’s explore whether LLCs offer adequate asset protection and, if not, what else you can do to make sure your estate and liquid wealth are safeguarded against all kinds of legal threats.

LLCs Explained

An LLC or limited liability company is one of the most common and effective business structures, especially in the US. In a nutshell, a limited liability company “limits liability” that business owners face in response to legal claims against the businesses.

In theory, a limited liability company means that a third party, like a customer, patient, or someone else, can’t sue your company and take your personal assets as damages if they are successful. Say that you run a small business and a customer wants to sue you because of a defective product. 

Even if the lawsuit is a success, any money in your personal bank account won’t be subject to the claim. Instead, only business assets will be vulnerable.

In reality, the truth is much more complicated, and your LLC might not be as much of an ironclad shield as you imagine. In fact, there’s a lot of case precedent showing that LLCs are as effective as wet tissue paper when it comes to asset protection!

Uses for LLCs

LLCs are still useful business structures, but mostly for business organization and management purposes rather than asset protection. When you set up an LLC, you can decide things like:

  • Who runs the business
  • The ownership structure of the business
  • Who’s in charge of making business decisions
  • And so on

All of this can be incredibly important, especially if you set up an LLC with one or more business partners. As an added bonus, LLC business structures are fairly flexible and scalable, so you can keep your company as an LLC even while it gains customers and resources.

Are LLCs Protective Against Legal Threats?

Realistically speaking, no, LLCs are not protective against legal threats. This might sound false at first glance – after all, aren’t limited liability companies supposed to limit your legal liability?

They are, but it’s all because of a specific legal principle that is trivially easy for judges and lawsuit plaintiffs to get around.

Why Can’t LLCs Safeguard Your Assets?

Imagine that there are two kinds of assets you have as a small business owner: business assets and personal assets. Your business assets might include things like company property, company vehicles, and money in a corporate bank account that you use for everyday business expenditures or employee salaries. 

Your personal assets include the money in your personal or savings account, your personal property, your home, etc.

There’s a clear line between those kinds of assets, right? Wrong. In truth, it’s easier than you think for an opposing lawyer to prove that the line between your personal and business assets is far blurrier or doesn’t exist at all. If they can successfully prove that in court, any successful lawsuit against your company could result in your “personal” assets being seized to pay for damages.

Examples of LLCs Failing for Asset Protection Purposes

Let's break down some concrete examples so you can grasp just how flimsy LLC protections are.

Imagine that you’re a successful entrepreneur and you recently hit the $10 million net worth mark. Congratulations! Normally, you do a stellar job of keeping your business and personal finances separate. But to celebrate this milestone, you decide to use a bit of the extra profits from your company to help finance the purchasing of a new house for you and your fiancé.

Uh oh. As soon as a lawsuit plaintiff discovers this fact, they can tell the judge, “They used corporate money to finance their personal gains! There’s no real difference between their business assets and personal assets!” A judge would have very little difficulty agreeing with that conclusion.

Here’s another example. You need to purchase a fleet of vehicles for your company to visit clients and carry out your business services. However, on a day when everything goes wrong and your schedule is particularly tight, you decide to drive one of your company vehicles to pick up your child from school.

Bad news. Just by doing that, you used company property for personal purposes, effectively breaking down the wall that separates your LLC from your personal accounts and assets. This is another way where a motivated legal opponent can completely dismantle the so-called “protection” of an LLC.

Bottom line: an LLC cannot be relied upon to safeguard your assets, your estate, or your liquid capital from any kind of legal hazard. You’ll need to look for alternative solutions.

Alternatives to LLCs for Asset Protection

On the bright side, there are other ways in which you can protect your assets, both against conventional legal threats like lawsuits and other possible threat vectors, like creditor claims or ex-spouse divorce claims.

For example, you can always transfer ownership of key assets to other individuals or companies. After all, if you don’t own the assets that a legal opponent is after, you can’t be ordered to give them up due to a legal judgment! 

However, you have to be careful with this strategy, as you could be accused of fraudulent conveyance if you make the transfer shortly before you believe you may need the assets to pay for a bill or court order.

Alternatively, you can create an offshore asset protection trust. Offshore asset protection trusts are the ideal, most effective instruments for asset protection, especially for high-net-worth individuals like yourself. Why?

As their name suggests, offshore asset protection trusts are set up in foreign jurisdictions. That means they are set up in countries other than your own, like the US. When this happens, any assets stored within those trusts are simply not subject to the same court claims and threats as assets in domestic trusts.

Imagine putting assets into a trust in the Cook Islands. When you do that, the assets no longer belong to you, so they aren’t subject to court claims. But more importantly, the trust itself is beholden to laws in the Cook Islands, not laws in the US. A court can throw paper at the trust as much as it wants, all to no effect.

Offshore asset protection trusts are effectively titanium vaults where you can seal assets for decades to come. If you set up your trust properly, you and future beneficiaries can still receive distributions from those trusts and the assets within, plus invest your assets wisely so your overall wealth grows while staying safe and secure.

It’s because of these reasons that asset protection trusts are highly superior defensive instruments compared to any limited liability company, bar none.

Setting Up an Asset Protection Trust

Of course, setting up an asset protection trust will take some time and effort, so you should get in touch with the experts at Dominion right away. 

If you want your trust to be as protective as possible, you’ll need the right legal specialists to draft the key documents, research the perfect jurisdiction for your needs, and ensure that your needs are met regarding investments, distribution schedules, etc.

More than that, the right legal experts can advise you on the formation of your trust so a judge or creditor can’t legitimately lay claim to any of your vital assets. It's best to get started with an asset protection trust set up at the earliest opportunity; you want your assets safe and sound months before they come under attack, not days or weeks.

Any assets you don't protect quickly could theoretically be subject to claims or court damages!

Get in Touch with Dominion Today

At the end of the day, you shouldn’t trust your LLC to protect you against any realistically tenacious legal opponents. 

When all is said and done, any lawsuit plaintiff, creditor, or other opponent who is motivated enough will have all the time, money, and case precedent needed to breach the proverbial walls of your limited liability company, whether they prove that you personally pierced the corporate veil or not.

An LLC is not enough to safeguard your assets. However, a Dominion-style, properly set up offshore asset protection trust is. More than that, the right asset protection trust can put your money to work for you, progressively building upon your wealth to grow your estate at the same time.

Why wait? Get in touch with Dominion today and learn exactly how we can help you protect your assets in perpetuity.

Dominion

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