LLC’s can be used to protect business assets by creating a holding company (See model below)
Operating Company(s):
- Perform day-to-day business with clients
- Does NOT own business assets
- Lease assets/equipment from Parent Company
- Management salaries, lease payments and profit distributions made to Parent Company
Parent (Holding) Company:
- Owns ALL assets for Operating Companies
- Provides management for Operating Companies
- Collects management salaries, lease payments and profit distributions
- Does NOT engage in direct business with clients
Client/Trust:
- Collect fair market salary from Parent Company
- Collect profit distributions from Parent Company
- Has liability protection on personal assets
- Has liability protection on business assets
How does this model protect business assets?
Litigation issues can only be filed against the operating companies in this model since they are the only entity engaging in business with clients. Because they lease equipment from the holding company, if an operating company is found liable and penalties are awarded against them, the company is limited to paying only what it owns…a small cash balance and no assets. Imagine you lease a truck from a local Ford dealership for your business and you cause a serious accident, is there any way that Ford will lose their truck because of your negligence? No. Likewise, the holding company cannot lose assets due to the negligence of their operating company. MainStreet encourages business owners to hold adequate insurance within their operating companies to cover liabilities, but recommends creating a holding company to protect their assets and their ability to provide for themselves and/or their family.
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