How effective are LLPs at protecting your assets?

On Behalf of | Mar 13, 2024 | Asset Protection Planning |

Some people create a business so they have a place to house assets to protect them from litigation, or to form a buffer between their business funds and personal wealth. A limited liability partnership is a form of business that might assist you in your asset preservation goals.

An LLP is a business structure that combines elements of partnerships and corporations. It involves multiple owners and is generally not difficult to establish. New Jersey is one of a number of states that allows the creation of LLPs.

The structure of an LLP

When you form an LLP with one or more partners, your personal assets, such as savings, investments, and property, are separate from your business assets. This is because an LLP is a legal entity separate from yourself.

Even if the business faces financial difficulties or legal claims, your personal wealth remains protected. Creditors can usually go after only what you have invested in the LLP.

Limitations of an LLP

While an LLP offers asset protection, its scope has certain limits. It is still possible for partners to become personally liable for their own actions or misconduct on behalf of the company. Such liabilities can also endanger the LLP. While you may escape responsibility for what another partner does, a resulting court judgment could deplete the assets of the business.

Additionally, an LLP structure might not shield certain types of professional malpractice. An LLP also does not protect your assets from non-business liabilities, such as personal injuries or debts unrelated to the partnership.

Alternatives to an LLP

For more comprehensive asset protection, individuals may consider forming an LLC, which provides a wider range of liability protection for all members, regardless of their level of involvement in the business operations. Other strategies such as trusts or insurance may be more comprehensive.

It is true that establishing an LLP may protect your assets while letting you pursue your entrepreneurial endeavors. However, the limitations of LLPs might lead you to explore other options.

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