The oldest and best known form of legal entity for asset protection is
a corporation. However, it's not suitable for the ownership of passive
investments or personal property. For tax reasons, personal assets such
as a home, automobiles, art or jewelry should be held personally or in a
trust. Investments should either be held in a trust, a partnership or
LLC. The assets of a business should be held in a limited partnership,
LLC or corporation.
Partnerships, LLCs and corporations are generally presumed
to exist to make a profit. When non income producing assets like a home
or personal art are the primary assets of a partnership or corporation,
it causes a lot of tax problems. And the tax law has a number of rules
that are designed to strongly discourage the use of a corporation to own
investment assets like stocks and bonds. Thus, there are very few cases
where a corporation is a useful way to own assets other than the assets
of an operating business.
The historic purpose of the corporate form of business was
to provide protection to investors from the creditors of a business.
This has been extremely effective for small investors who have no
involvement with the operations or policy decisions of the corporation.
Where an investor is an executive of the corporation and makes
management decisions, an injured party (plaintiff) will attempt to sue
the manager as well as the corporation. Thus, the corporate form of
business does little to protect the personal assets of the investors who
also are involved in running and operating the business. Nor does the
corporate form of business help to protect the corporation's assets
from the claims of creditors of the corporation.
In addition, if a closely held business is operated as a
corporation and if more than 50% of the stock is owned by a single
person, then a creditor of that individual owner could get control of
the stock -- which would then give the creditor control of the
corporation. The creditor could then vote to liquidate the corporation
in order to get the assets of the corporation.
Most of these problems can be solved through the careful use
of multiple corporations or with other entities such as trusts, limited
partnerships or limited liability companies.
