Asset Protection Strategies

Introduction   Limited Liability Companies (LLCs) are often touted as a key tool for protecting assets from business risks, offering members a shield against personal liability similar to corporations while providing partnership-like flexibility. However, as evidenced by extensive case law, LLCs frequently fail to fully protect assets, particularly when members engage in misconduct or neglect formalities. We explore why LLCs do not always safeguard personal wealth, citing key rulings where courts imposed liability. Moreover, to address effective asset protection planning, we incorporate asset protection strategies tailored for asset protection. Business owners seeking to protect assets from lawsuit must look beyond LLCs, consulting asset protection trust lawyers or an asset protection company if required.   In asset protection for business owners, LLCs promise to limit exposure, but judicial scrutiny often pierces this veil. For instance, questions like “how to protect your assets from lawsuit?” arise frequently, as homestead exemptions rarely come close to market valuations and trust options provide stronger defenses. Similarly, individuals pondering “how to protect my assets from lawsuit” should consider irrevocable trusts over relying solely on LLCs. Court cases reveal patterns of veil piercing, tort liability, and bankruptcy vulnerabilities that undermine asset protection. By integrating asset protection planning with case analysis, this discussion highlights why LLCs fall short and recommends more robust asset protection strategies like trusts managed by an asset protection trust lawyer or other fiduciary.   Protecting assets through an LLC by itself requires strict adherence to separateness, but as cases show, failures frequently lead to exposure. For example, asset protection in California involves leveraging entities like LLCs alongside trusts from an asset protection company. This article examines veil piercing, personal liabilities, contractual pitfalls, and bankruptcy issues, while weaving in practical advice on how to protect assets via asset protection for business owners.   Veil Piercing: When Courts Disregard the LLC Entity for Asset Protection Failures   Veil piercing is a primary reason LLCs do not reliably protect assets, allowing courts to hold members personally liable by treating the entity and individual as one. This equitable remedy, adapted from corporate law, applies when the LLC is abused for “injustice.” There are thousands of cases that we’re aware of (and tens of thousands that were settled before going to trial that we’re not aware of) where protecting assets via LLCs failed due to commingling, undercapitalization, or domination.   A landmark case is Kaycee Land and Livestock v. Flahive (2002), where the Wyoming Supreme Court affirmed veil piercing for LLCs, similar to corporations, when used to evade environmental liabilities. Here, members’ attempted to protect personal assets which crumbled under evidence of entity mishandling, exposing their homes and savings. This underscores that when using an LLC by itself for asset protection planning, it must include maintaining formalities to truly protect assets from a lawsuit.   In California, for example, where asset protection in California needs to be stringent, cases like Filippi v. Elmont Cemetery, Inc. (2006) illustrate veil piercing for undercapitalized LLCs involved in torts. The court held members liable for desecration, piercing the veil due to personal fund use, further highlighting another reason why business owners need asset protection strategies beyond just LLCs. Consulting asset protection trust lawyers can potentially help form irrevocable trusts as part of asset protection for business owners.   How to protect your assets from a lawsuit often involves avoiding such pitfalls; for example, similar to most states, California’s Code of Civil Procedure § 704.730 offers homestead protections up to $600,000, but LLC misuse negates this. (Click here to see what your homestead protections looks like).   In NetJets Aviation, Inc. v. LHC Communications, LLC (2008), federal courts pierced for commingling, a common issue using LLCs for asset protection in California. More specifically, a federal appeals court addressed a breach of contract case where NetJets sought to hold the sole member of LHC Communications, LLC personally liable for the LLC’s obligations. The court pierced the LLC’s corporate veil after finding that the member had commingled personal and LLC funds, failed to maintain separate books, and undercapitalized the entity, treating it as his alter ego to evade creditors. This misuse of the LLC structure justified imposing personal liability on the member for the contractual debts, emphasizing that the LLC’s limited liability protection was not absolute. The ruling reinforced the principle that proper separation of personal and business assets is critical to maintaining asset protection under LLC status. Members lost personal wealth, proving LLCs alone won’t suffice to protect assets.   Fraudulent use exacerbates failures. Litchfield Asset Management Corp. v. Howell (2002) saw veils pierced for siphoning funds, with members liable for transfers. This case advises on how to protect my assets from lawsuit by using an asset protection company to structure trusts. We can note similar outcome in Morris v. Cee Dee, LLC (2004), where sham LLCs for creditor evasion led to asset forfeiture. Idaho Supreme Court examined a case where creditors sought to hold the members of an LLC personally liable for the entity’s debts, alleging the LLC was formed to shield assets from creditors. The court pierced the LLC’s veil after determining that the entity was, in fact, a sham, created with “no legitimate business purpose” and used solely to evade existing liabilities, constituting fraudulent intent. Evidence showed the members transferred personal assets into the LLC to avoid collection, undermining the LLC’s separate legal identity. This ruling reinforced that LLCs do not provide absolute asset protection when a court unilaterally decides there is any level of illegitimacy or fraud, holding the members personally accountable for the debts.   Even without illegitimacy or fraud, injustice can trigger piercing. In McConnell v. Hunt Sports Enterprises (725 N.E.2d 1193, Ohio App. 1999), an Ohio appellate court examined a dispute involving an LLC formed to operate a hockey franchise, where one member misused the entity to exclude others from profits and management rights. The court pierced the LLC’s veil to hold the controlling member personally liable, finding that the LLC was used as an instrumentality to