No Exemptions for Business

April 13, 2006

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A business entity, such as a corporation or LLC, is not eligible for asset exemptions. Moreover, it must be funded with assets. If you don't contribute any assets to the business entity (i.e., you fund the entity entirely with leases and loans), you would be likely to lose the limited liability ordinarily enjoyed by the owners of these businesses forms.

But the investment in a business entity's assets can be protected from liability even in the absence of asset exemptions, through strategic structuring and funding practices, including the use of a holding entity and a separate operating entity; leases and loans; and the encumbering of the operating entity's assets with liens that run in favor of the owner or holding entity.

That the business's assets can be protected from liability, even though asset exemptions will be unavailable to the business entity, illustrates an important point in asset protection planning: If you are to effectively protect your business and personal assets, a comprehensive, or multi-layered, approach is required. One strategy alone, such as exemption planning, will usually be insufficient.

Warning

Be cautious when reading other material on the topic of asset protection and relying on information in some other exemption tables. Since exemptions are available only to natural persons, and not to business entities, do not be misled by tables listing partnership assets as exempt.

Partnership assets are not exempt. Asset exemptions are not available to business entities. Thus, these assets are fully subject to the claims of the business creditors.

Further, the business owner possesses a personal property interest (i.e., his or her interest in the partnership), but does not own any of the specific assets in the partnership. The partnership itself owns these assets. Accordingly, the owner cannot claim any exemptions in these specific assets, either.

What providers of these tables really mean to say is that a partner's personal creditors can't directly attach the specific assets owned by the partnership. However, they can attach the partner's ownership interest in the partnership itself, which is deemed to be a type of personal property. In a general partnership, the creditors might then be able to foreclose on the interest and liquidate the business. Thus, in this way, they can reach the business's assets (note that in most states, an LLC offers better protection from the claims of the owner's personal creditors).