It has recently become a popular liability protection strategy to divide your business assets by placing your business in one entity and your equipment and/or building in another entity.
Let me illustrate this by using an example.
One of our clients owned an insect and pest control business.
They had been in business for many years-handed down from father to son.
The business had two locations in two different counties.
They put each location in a separate corporation.
The buildings were placed in separate LLCs.
Their trucks and spray equipment were put in still another separate LLC.
Doesn't that seem a bit much?Just think of all the bookkeeping and checking accounts and tax returns! One day one of their employees made a mistake while mixing the chemicals and a little girl got sick.
She fully recovered, but the parents were angry and filed a lawsuit.
The company had a perfect reputation for many years and felt bad about the error and wanted to be fair and kind to this customer.
However, the parents had dollar signs in their eyes.
Long story short, because they had strategically placed their assets in separate places, the sue happy parents were only able to go after one corporation.
They received compensation for their daughter's illness, but were not able to take everything and the company was able to recover-with extra precautions in place, of course.
The moral of the story is that separating your assets gives you the opportunity to do the right thing without losing everything.
Separating your business and assets can not only be a liability protection but there can be some tax benefits as well.
For example, if your building and business are in separate LLCs, you can use your businesses income to pay rent to your building LLC.
By doing this you can save on Social Security and Medicare because rental income is taxed differently than business income.