The Secret of Asset Protection Planning: Compartmentalization

The secret of great asset protection is not secrecy or privacy, but “compartmentalization“.

This means that your assets are separated and protected from your liabilities and risks.

The ultimate example of the successful implementation of compartmentalization can be found in the USS Missouri, one of the most powerful battleships ever created and based upon the powerful Iowa Class Battleship model.

The Iowa Class Battleship was designed during World War II to be fast and nimble yet tough and reliable. Too much armor would make the ship slow and cumbersome, so the US Navy focused instead on compartmentalizing the ship so that no single strike could cripple or sink the ship.

The ship was divided into separate compartments protected by fire walls limiting any damage to the particular compartment that was hit. It was designed to withstand multiple strikes from torpedoes and shells without sinking.

In 1989, this compartmentalization unfortunately underwent its ultimate test when an explosion in one of the gun turrets set off the magazine (ammunition supply) below the turret. This explosion was catastrophic and killed everyone inside the turret compartment, but the ship itself was able to survive the blast intact; a blast that would likely have obliterated lesser ships.

This was because the explosion and fire that occurred could not spread to the other compartments.

This same concept can be applied to your business and personal assets. You NEED to separate your liabilities from your assets. Protect the sources of your income and wealth from the dangers inherent in doing business and simply living.

Wordle: The Secret of Asset Protection Planning: Compartmentalization

What is an LLC? Why should you care?

A limited liability company (LLC) is a hybrid business entity that blends together characteristics of a partnership and a corporate structures. It is incredibly flexible giving limited liability to its Members (the owners) just like a corporation, but offering the ease of management of a partnership.

86527417

It also can offer interesting tax advantages depending upon how you want to use it (but only if properly set-up). It can be set up to be treated as a “disregarded entity” providing “pass through” tax treatment, or it can be set up as a “taxable association” in which case it is taxed like a corporation, but without some of the negative aspects of a corporation. This can often avoid double taxation.

But the most interesting aspect of an LLC is its ability to protect your assets. How can an LLC protect your assets?

The LLC has many special features similar to a partnership that are very beneficial for asset protection:

  • A partial LLC interest, unlike shares in a corporation, cannot be easily seized by creditors. If a Creditor attempts to take your Membership Interest, the creditor will only receive an “assignment” of the interest. The creditor can take away your membership interest, but will not be able to vote in the absence of the unanimous approval of all the other Members.
  • An LLC can require Members to make additional contributions of capital. So if a creditor takes away your Membership Interest, the LLC may require the Creditor to make additional contributions to the LLC. If the Creditor refuses, he may lose his interest in the LLC.
  • If the LLC shows a profit, it is not necessary for the profit to be distributed to the Members but can be retained by the LLC. However, the Members will be taxed on this profit even though they did not receive it. So if a Creditor takes your Membership Interest, the LLC can operate at a profit, and may be able to force the Creditor to pay taxes on profits which the Creditor never received.

A creditor who attempts to take your shares in the LLC will only get an assignment of non-voting shares. The remaining shares will be held by the other members who may be friends, family, or even specially designed trust that will protect your interests. These other Members will be able to vote on who becomes Manager of the LLC, not the creditor that took an assignment of interest.

The other members may choose to appoint you or another friendly person to be the Manager of the LLC. As Manager of the LLC you will be able to decide whether or not you and other employees get a salary, whether or not assets are sold, whether or not profits are distributed, whether or not there is a need for additional contributions from the Members, etc.

In essence, a Creditor who takes your shares in a cleverly designed LLC will not be able to vote or control the company, will not be able to force distribution of assets or profits, may have to pay taxes on income earned by the company even though it never received the profits, and will be vulnerable to demands for additional capital.

As you can see this would be a very unpleasant situation to be in if you were a creditor, but a very good situation to be in if you are trying to protect your assets. Few creditors will want your membership interest in the LLC when they realize what a hornets nest they are getting themselves into.

I have designed a specific system to be able to take advantage of these attributes of an LLC. I call it The Personal Preservation Fortress®. Check it out if you would like to get more information on how to effectively and affordably protect your assets.