PROTECTION FOR MY BUSINESS EQUITY

Asset protection planning is essential in ensuring your personal assets are safe from creditors and lawsuits.  Creating an LLC or corporation typically helps separate and protect your personal assets from business ones. However, your business assets remain exposed if you run an actual business.

Is there a way you can protect them too?

Short answer is yes. You can offer sufficient protection to your business equity by reevaluating how you structure your business. Here’s a short breakdown:

The Best Choice for Protecting Personal and Business Assets

Small business owners get sufficient personal asset protection from an LLC or corporation when business creditors come knocking. However, since the business assets in this instance are exposed, the business is at risk of losing everything, which could spell disaster.

Despite wanting to protect your personal and business assets seeming like opposing goals, organizational structure can make achieving these two goals simultaneously possible.

Typically, business assets are shielded from personal creditors to an extent. However, assets outside the business are fully insulated from the firm’s creditors. Therefore, the optimum business structure for safeguarding corporate and personal assets would be to have two entities:

• Operational entity – This is the business entity that takes all operational risks. It possesses but doesn’t own the business assets.
• Holding entity – This is the business entity that owns the business assets.

In order to optimize this multi-entity approach, careful thought and professional counsel are required. You must balance funding between both entities, using equity and debt such as loans, leases, and liens. The assets of the operational entity are protected to an extent by having a separate holding company owning them. Therefore, you get multi-layered asset security.

Why Using Two Limited Liability Companies is Better

The multi-layered asset security approach could work better with two LLCs than two corporations. Moreover, the two LLCs must be formed in a state that’s adopted the Revised Uniform Limited Partnership Act. This act prevents the foreclosure and liquidation of business assets for the satisfaction of a personal creditor.

You can open and fund the holding entity as the individual owner. The holding entity can then own and fund the operational entity. The operational business, therefore, runs as a subsidiary of the holding entity.

For the best protection, the holding entity should not participate in any business activity. Therefore, it becomes almost immune to liability. The operating company then takes all the operational risks, with limited liability, which only extends to the holding company.

Your business equity as the company’s owner remains protected since you do not own the operating business directly. As you scale to operate several businesses through the holding company, it is paramount that you maintain each operating company’s operations separate from each other.

Please also see under corporations when an LLC and a corporation can help with protecting your assets with additional ability to offset state income tax!

Save Tax Dollars Through Upstreaming

Upstreaming is a tried and true method of saving on taxes by skillfully moving income from one subsidiary to its parent. Things are rarely simple when it comes to taxes, but there are various scenarios where upstreaming can produce substantial tax savings. Of course, in a business situation, you will need to show there was a business reason for your actions beyond just saving on taxes, and you will need to document your actions in preparation for any future audit.

Upstream to a Company in Another State

If a business is in a state with high state income tax such as California, it’s possible to reduce that high state tax by upstreaming to a company that is domiciled and has nexus in a state with lower income tax or to avoid state income tax completely by upstreaming to a company in a state with no income tax. You will not have to pay tax in the home state if you are dealing with C corporations. Here are states without income tax:

• Alaska
• Florida
• Nevada
• South Dakota
• Texas
• Washington
• Wyoming

The requirements for showing a company has nexus varies across all 50 states. However, some factors that commonly are considered are:

• Physical presence such as offices, warehouses, showrooms, etc.
• Representatives operating within the state such as employees, salespeople or other agents
• State-specified number of transactions or sales

Upstream to a Company with Another Tax Structure

“Upstreaming” may also refer to moving income to a company with a more beneficial tax structure. You may have multiple companies with different tax set-ups. One might be a corporation, and another might be a partnership, for example. You may want to upstream where one offers a tax advantage over the other.

Upstream C with a Drop: Moving Assets in Related Entities Through Reorganization

Using the method of “upstream C with a drop” you can move assets within related entities without being taxed on it. The parent company acquires the subsidiary’s assets through a reorganization of the subsidiary’s assets under 26 U.S. Code § 368(a)(1)(C). The parent company then contributes some of the subsidiary’s assets to the new corporation (this is the drop) and may keep part of the subsidiary’s assets under its own control. In this manner, some of the subsidiary’s assets are shifted to the parent corporation tax-free under 26 U.S. Code § 355.

The subsidiary need not be legally liquidated but can be “deemed” to have been liquidated for federal income tax purposes. This can be done by changing the type of entity, such as converting a corporation to an LLC or by making an election by checking the appropriate box on IRS Form 8832 to change the subsidiary’s tax classification under 26 CFR 301.7701-3.

Upstream Gifts to a Relative

There are tax advantages to upstreaming gifts to a parent, so the same property will be included in the estate you will inherit. The purpose of this is so you can get the fair market value of the property at the time of your parent’s death rather than the FMV at the time you first acquired the property. This new FMV passes to you even if your parents pay no estate tax.

Conclusion

There are a number of ways to reduce your clients’ taxes through upstreaming. Once you introduce the concept to them, you may be able to help your clients in multiple ways using various upstreaming methods.

Learn The Best Ways You Can Protect Your Assets

There are more techniques you can use for adequate asset protection. Contact The Second Estate and employ the best means for the assets you own.