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Asset Protection

By Sean M. Hugo, CPA

Recently a client we will call Mr. Smith dropped by the office to pick-up his business and personal tax return.  I happened to be walking by the reception desk where I stopped to visit with him for a second and in passing he asked me to setup an LLC for an airplane he just purchased.  I told him that I would get it taken care of and didn't give it much thought at the time  as it is common practice to setup an LLC to own property or equipment to protect them from liabilities that may arise from other businesses, etc.  Mr. Smith owns a construction business that is setup as an S-Corp where he is a 100% owner and worth around two million dollars.  Mr. Smith and his wife also have considerable personal assets as well. 

Recently Mr. Smith began taking flying lessons and decided to purchase an airplane.  The next day when I was getting ready to start working on the LLC I started thinking about Mr. Smith's situation.  Mr. Smith wanted the LLC setup to protect his business assets and personal assets in the event a liability arose from the airplane.  As I thought through what the end goal was it was clear that just sitting up an LLC would not provide Mr. Smith the protection from liability that he was after.  Let's suppose that Mr. Smith took a passenger up in the airplane and god forbid there was a crash where the passenger was either seriously injured or killed.  In a situation like this there is likely to be a lawsuit.  One possibility is going to be a lawsuit brought against the LLC that owns the plane claiming the plane was not properly maintained, etc.  The other possibility is going to be a lawsuit against the pilot claiming pilot error was the cause.  By setting up the LLC this would protect Mr. Smith's interest in his other business and his personal assets and leave only a wrecked plane as an asset in the new LLC there would not be substantial assets for the plaintiff attorney to go after in this situation.  As a result the plaintiff attorney will turn his focus to the pilot an claim pilot error.  When this happens all of Mr. Smith's personal assets will be at risk such as his personal residence, bank accounts, etc.  Additionally, since Mr. Smith owns 100% of the S-Corp stock of his construction business the business will also be at risk.  If there was an accident Mr. Smith's family could be financial devastated. I called Mr. Smith that day and explained to him my concerns and I suggested he and I met with Heath Merchen who is an Attorney that works in our office to discuss an asset protection plan that will protect Mr. Smith's assets in-case a liability arose from the airplane. 

If you are a business owner don't assume just because you have setup an LLC or a corporation that your assets are safe.  It would be a good idea to sit down with your attorney and CPA to discuss your unique situation.