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Inside and Outside LLC Liability

Because I am an LLC Lawyer, I like to explain situations with examples. To understand the benefits available from the LLC, let’s look at a typical example. John and Mary own an apartment building as tenants-in-common. We know that holding the property, as they do now, exposes them to great danger. Ownership of rental property creates more uncontrolled liability and lawsuit risk than any other business or profession we have seen. And because this potential liability usually cannot be covered by insurance, a single unpredictable event, a mistake, or just bad luck can wipe out everything built up over the years.

Inside and Outside LLC Liability

Injuries to tenants, problems with lenders, lawsuits from future buyers-all subject everything that John and Mary own to potential liabilities from the property. We call this type of liability-arising from the property itself-inside liability. John and Mary need to be protected from inside liability.

To make matters worse, a lawsuit or claim against John or Mary from a matter not related to the building exposes the equity in the apartment property to seizure in satisfaction of that claim. We call this type of liability outside liability. John and Mary’s interest in the property must be protected from outside liability. If one of them is involved in an auto accident causing serious injury, they do not want to lose the property because of this outside liability. Clearly, owning the apartment building in the current manner is not sound business planning. What other options are available to them?

Example of Inside and Outside LLC Liablity

It should be clear from this discussion that the LLC will generally be the strategy of choice for most business arrangements. For personal planning and asset protection the Family Savings LLC can be designed to accomplish many of your objectives.

In the usual case, Husband and Wife form the Family Savings LLC. Each are members owning a 50% interest. Financial assets such as brokerage accounts, mutual funds, savings accounts and insurance policies are transferred to the LLC. As discussed later, the family home should not be placed in the LLC. Also, if investment real estate is owned, these properties should be placed in separate LLC’s. A Dangerous Asset such as real estate, which creates significant potential liability should not be placed in the same LLC with your financial assets.

In the event of a future lawsuit against the Husband or Wife the assets of the Family Savings LLC may not be seized by the creditor if the membership interests are properly protected within a Family Savings Trust.

The advantage of the Family Savings LLC over the FLP is that Husband and Wife, as members of the LLC, are not responsible for any debts or obligations of the LLC. This is particularly important if family assets consist of Dangerous Assets such as real estate or other businesses.

The Family Savings LLC is a flexible and convenient strategy for protecting family wealth from the threat of lawsuits and claims. It provides excellent protection for valuable assets such as stocks, bonds, mutual funds, insurance and annuity investments and other savings vehicles. Separate LLC’s should be used to hold rental real-estate to shield you and your other assets from any liabilities associated with the property.

Free Consultation with an LLC Lawyer

When you need help with liability issues in an LLC, or if you have business or asset protection questions, please call Ascent Law for your free consultation (801) 676-5506. We will help you.

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506