by Richard Keyt, Arizona asset protection attorney
One of the fundamental rules of asset protection is: Do not put all your eggs in one basket because if something goes wrong, you will lose all your eggs. This concept applies to businesses. A common mistake people make who own an entity that operates a business is they will cause their entity to acquire valuable assets such as real estate or expensive equipment. Having the business entity own valuable assets could create an easily avoidable financial loss if the business has financial problems or goes bankrupt because the creditors of the business will take the real estate or equipment to satisfy judgments.
Bad Example 1. Homer Simpson forms Best Burgers, LLC, to operate a fast food business with multiple employees. The LLC purchases land for $500,000 and builds a restaurant on the site for $1,500,000. An employee is sent to the grocery store to buy lettuce and causes an auto accident that severely injures a biker. Biker sues and gets a jury award of $3,000,000. See “$3 Million Jury Verdict Arising From a Collision between an Employee Driving a Truck & a Bicyclist.” Homer loses his business and the $1,500,000 he invested in the land.
If you want to maximize asset protection and minimize a financial loss from operating a business, you should separate the business from valuable assets. Consider the night and day economic difference if Homer formed a second LL to own the real estate.
Good Example 2. Homer forms H&M Simpson Properties, LLC, which purchases the land and constructs the improvements. The real estate LLC leases the premises to the operating LLC. The lawsuit causes Best Burgers, LLC, to file for Chapter 7 bankruptcy and die. The loss of the business does not affect H&M Simpson Properties, LLC, or its $1,500,000 investment in the land. By diversifying and separating the ownership of the business and the land in two LLCs, Homer’s asset protection planning saved him $1,500,000. Homer can form a new LLC with a new name that will enter into a lease with the real estate LLC and restart the fast food business in the same location.
Bottom Line: If you own a business, especially a business that has employees, you should not put valuable assets such as real estate, equipment or intellectual property in the same entity that operates the business. Diversify and plan now to protect the assets in the event the worst happens. Create one or more additional LLCs to own the valuable assets and lease the assets to the operating business.