How to Protect Business Assets in an S Corporation vs. Partnership

From the Houston Chronicle

The use of limited liability entities -- including S corporations, C corporations, limited partnerships and limited liability companies -- is a vital component in any asset protection strategy. However, it is not the only technique you can use. You can also implement legal techniques that serve to deter potential plaintiffs from targeting your business for a lawsuit, or to cause them to settle on more favorable terms than they otherwise might.

Step 1

Identify liability-generating assets. These are assets that have a high likelihood of generating a lawsuit.

Step 2

Separate liability-generating assets from non-liability-generating assets. For example, you may own a building and a business. If the building is not likely to generate a lawsuit, but you work in a highly litigious industry, don't have the entity that owns the business also own the property. Instead, you may have two separate companies: One S corporation owns the business itself, while another entity -- perhaps another corporation or an LLC -- owns the real estate. The company that owns the business leases the building from the other entity. This way, the building is not put at risk if the S corporation is targeted in a lawsuit.

Step 3

Strip the entity of equity. For example, you may wish to encumber a corporation that owns real estate with loans against that real estate. You may have some cash on hand, but that cash on hand is offset by your liability for the loan, making your business substantially less attractive to plaintiff's attorneys looking for a deep pocket.

Step 4

Separate your name from your business name. For example, if you are a prominent individual and your name is John Harold, don't name your corporation "John Harold Enterprises." The idea is to keep a low profile, and avoid being targeted as a deep pocket.

Warning

Consult an attorney for advice pertaining to your specific situation before making any major moves. For example, if you wait until after a liability-generating event, such as a workplace injury, to move assets out of your S corporation, you could be cited under fraudulent conveyance laws, and have the transfer disallowed. Be conscious of ownership restrictions on S corporations. S corporations cannot own shares in other S corporations, but they can own a membership interest in an LLC.

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DATE: Wed., Sept. 23, 2015, 8:30 am to 10:30 am
LOCATION: Comfort Inn, 8 Commerce Dr., Collinsville, IL 62234
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