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Using Holding and Operating Companies

Clearly, the limited liability company (LLC) and corporation emerge as the two best choices of all the types of organizational forms available to the small business owner, in terms of asset protection planning and limiting liability in your business structure.

Ultimately, the LLC emerges as the better choice in most cases, and in particular as an ideal vehicle for asset protection purposes, when comparing the two types of entities.

However, the business owner faces an asset protection dilemma, even when the business is formed as an LLC or corporation. Specifically, protecting the owner's assets against the claims of personal creditors and against the claims of business creditors are competing interests. Assets placed within the business form are vulnerable to the business's creditors, but protected, to some extent anyway, from the owner's personal creditors. However, assets kept outside of the business form are vulnerable to the owner's personal creditors, but protected from the business's creditors.

So, how can you protect all your assets from both business and personal creditors? Both objectives can be accomplished simultaneously through the proper funding and structuring of the business.

The ideal business structure consists of two entities: an operating entity, which has possession of the assets, but does not own the assets (unless they are encumbered in favor of the holding entity or owner), and a holding entity, which actually owns the business's assets.

A simpler option for your business structure is the one-entity approach. While it may be suited to some situations, generally it does not provide the flexibility and asset protection of the multiple-entity approach. Moreover, once you adopt the multiple-entity approach, you'll need to balance the funding of these entities through both equity and debt, using leases, loans and liens.