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How an LLC Can Protect Business Sale Proceeds

George James, CFP®

Director of Financial Education

Last Updated
July 20, 2022
Businessman signing on contract documents after reading

Why the End of the Business Shouldn’t Be the End of the LLC

If you own and have been operating a small business or rental property, you’re already aware the whole reason to have a limited liability company (LLC) is to legally separate your business assets from your personal assets. But have you considered implementing an LLC to protect your assets following the sale of your business?

Why it matters

Following the sale of your business, you’ll likely have significant assets. Because you’ll need these to fund your lifestyle and provide a legacy for your loved ones, it’s important to protect assets from creditors and unexpected lawsuits. If the proceeds from the sale of your business are held in your name, they may be vulnerable. Here are some benefits of establishing an LLC for business sale proceeds:

  • Judgment against the LLC – Any judgment against the LLC may result in the seizure of assets from the LLC. Creating a legal separation means your personal assets are protected.
  • Personal creditors – On the flip side, when properly drafted, the provisions of an LLC can help prevent any personal creditors of LLC members from seizing LLC assets.
  • Bankruptcy – If the LLC files for bankruptcy, its members are not required to use personal assets to cover the company’s debts.
  • Legacy planningNot only can an LLC help you protect and control assets during your lifetime, but it can also keep assets in the family after you die, all while reducing your loved ones’ tax liability. When children and other family members are designated as non-managing members of the LLC, any assets transferred to them after your death are eligible for a valuation discount of up to 40%. This allows you to transfer more assets to your heirs without hitting the gift tax exclusion limit.

Tips for increased protection

If you decide to establish an LLC to protect business sale proceeds, take the following steps to maximize that protection.

  • Run the LLC as an independent entity – This means keeping LLC financial records separate from your personal assets. Manage the LLC as a business, not an extension of your personal wealth.
  • Consider a trust for personal assets – To further protect your personal assets, consider holding them in a trust.
  • Maintain proper insurance – Insurance provides an important level of protection for both personal and business assets, so it’s important to maintain adequate coverage.

At Creative Planning, we help business owner clients navigate a wide range of challenges, including selling their business and protecting the proceeds. As a nationally recognized wealth advisory firm, we deliver a team of credentialed, educated, experienced and action-oriented advisors, including Certified Financial PlannerTM professionals, attorneys, insurance specialists and other professionals dedicated to helping you achieve your goals. We work together to help ensure all aspects of your business and personal finances are well cared for. If you’d like help establishing an LLC to house your business sale proceeds, or help with any other financial matter, please schedule a call.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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