Step Four on the Ladder: Liability Protective Entities for Investment Assets

• Author: Jeffrey Robert Matsen
• Profession: Founder and managing partner of Matsen Voorhees Mintz LLP
• Pages: 39-47

39

CHAPTER

8

Step Four on the Ladder

Liability Protective Entities for Investment Assets

We have previously discussed the importance of establishing and maintaining liability-protected entities

for investment assets. In the case of business entities, the corporate form is a traditional form of doing

business; corporations provide the necessary shield of liability for operating business assets and are the

most common vehicle selected for business operations. Most business operations that produce commodi-

ties and own hard assets like equipment utilize the corporate form. Limited Liability Companies (LLC)

are more popular for consulting services and internet companies that really act more or less as distributors

and have no traditional hard assets such as equipment and fixtures.

When it comes to investment assets, however, the LLC is the entity of choice. LLCs are utilized instead

of corporations because they provide more flexibility tax-wise and have the same shield of liability as the

corporation. The LLC is a passive entity for tax purposes because it is either a disregarded entity (taxed

like a Proprietorship) if it is a single-member LLC, or a pass-through entity (taxed like a Partnership) if

it is a multi-member LLC. (Note that the LLC can also elect to be taxed as a Chapter S Corporation or

even a C Corporation.)

In talking about liability protection, we have to differentiate between Inside Creditors and Outside

Creditors. This concept has been previously discussed in the Introduction contained in Chapter 1 of this

book. To review, Inside Creditors are those creditors who have claims against the entity that contains the

asset itself. For example, if a business owner or professional has a rental property and places that property

within an LLC, and if someone gets hurt at the rental property, the claim can only be directed against the

LLC. The owner’s personal assets are, therefore, protected from such Inside claims. Inside Debt protection