It is important for every business owner to keep his assets protected and private. Having a domain investing business is not an exception to that. It is your goal as a domain investor to keep your assets safe and secure to avoid a catastrophic loss when the business fails to reach its goals.
One strategy for this is by forming a business structure called a limited liability company (LLC). However, it is not just by having this type of business formation that you are ensured of asset protection and privacy. You must properly maintain your LLC status and know the strategies you can apply to effectively safeguard your assets.
This article will help you determine if a limited liability company is best suited for your domain investing business. It will discuss the definition and benefits of an LLC and how you can build it up to make it more efficient in protecting your assets and privacy.
What is a Limited Liability Company (LLC)?
From its name limited liability, this type of business structure protects your personal assets by not making you liable for incurred debts of the business. For a small domain investing business, this formation is beneficial to keep your personal assets protected. If you solely own the business, you can be treated as an LLC sole proprietorship.
On the other hand, if one or two more investors own the business you can still be treated as a partnership while having a limited liability company. By having an LLC, if creditors demand payment of debts, your personal assets are shielded and just your business assets are at risk as means of payment.
If in case, legal actions are made against your business, cases are filed against your company and not your name. Basically, LLCs are treated as a separate entity. Unlike in sole proprietorship, where your personal bank accounts and assets are at risk whenever creditors demand payment of unpaid debts. You can also keep your privacy by having to use the company’s name instead of your name in dealing with clients and other transactions.
How to Protect Assets with an LLC
LLC as a Separate Entity
It is vital that you keep your company and your personal actions separate. Otherwise, you can still be personally liable if proven that your business and personal operations are intermingled. For this reason, your domain investing business must have a separate bank account and credit cards. Consider your business as a separate entity. Have all financial records and reports named after your company. By doing this, you are validating that your personal and business dealings do not mix.
Maintaining your LLC status is also important. For this reason, it is smart to check with your state regarding the requirements for having a limited liability company. Bear in mind that states have different regulations in terms of forming an LLC.
Good Credit Standing
In acquiring loans for your business, you may need to write your name as a guarantor. As a consequence of this, if your domain business does not have enough money to cover unpaid debts and loans, you are at risk of losing your personal assets.
Because of this, your company must establish a good credit standing. Make sure payments made by your business are on time and updated. This will help you build a good credit standing among creditors as well, without the likelihood of losing your personal valuables. Additionally, a good credit standing will also build up your reputation, not only among creditors but among other investors as well. This will create the idea that your domain investing business is stable.
Appropriate Amount of Money
As stated above, your business bank account should be independent of your personal bank account. It is advisable that you put just enough money in your business account to prevent a substantial loss in case of lawsuits and unpaid debts.
It also helps that you maintain the LLC status of your business properly and ethically to avoid having your personal assets seized. Nevertheless, your business bank account must also not have an amount of money that is less than what the business needs to operate. This might lead you to be seen as a fraud, as you seem to under-capitalize your business.
Insurance
Having insurance is not limited to a limited liability company. Most businesses acquire insurance for protection. Your domain investing business could use insurance to protect you from losses and other liabilities. It would help you protect your assets in case lawsuits are filed claiming negligence or fraud by having it cover the legal expenses.
Insurance can also be acquired for business properties and workers’ compensation. Talk to an insurance agent to know which policy suits your domain business. As policies may differ among insurance companies, review the policies presented to you before getting one.
Holding Company
A holding company can be an LLC that keeps your assets separate from your operating business, commonly referred to as a subsidiary. In the event of loss or debts incurred by your domain investing business, your holding company’s assets are not liable for them. Only the operating business itself may be sued or demanded to make the payments. It gives you more control in allocating assets to your domain business.
As a holding company that is a limited liability company, it is still important to keep it separate from its subsidiaries. This is to avoid “piercing the corporate veil.” A term used when the holding company is considered to be intermingled with its operating business, that it can be held liable for the failure of its subsidiaries. This type of company is recommendable for owners with multiple operating businesses.
If you have domains divided into different businesses, then you can benefit from having a holding company, collecting profits from these subsidiaries while still having control of the major business decisions.
Trust
Trust is another legal way to protect your assets against seizure from creditors. One type of trust you can consider is the asset protection trust. Although less than 20 states in America allow asset protection trusts, you are not required to be a resident of any of those states to form one. This trust gives you the advantage of protecting your asset while still being in control of the business.
As you declare yourself as the grantor, you become a beneficiary of the trust. At the same time, the person you assigned to be the trustee must run the LLC according to your instructions. As you place your assets in the trust, they will then be owned by the trust.
Because of this, not only will you be protected from inside liability, but also from outside liability. An example of this is when you are personally being sued by creditors regarding debts independent from your business, your LLC interests cannot be touched by the creditors because it is owned by the trust. But if it is not a trust, creditors can look into your personal assets, including your LLC interests.
In setting up a trust, consent of all members must be obtained if your LLC has multiple owners. The trust must also be established before any outstanding debts exist to avoid claims of fraud by creditors against it. Although it may be time-consuming and costly, several business owners with high equity still consider forming a trust for asset protection.
In case of the death of the owner, it also avoids probate, which discloses records to the public (including creditors), which maintains the LLC’s privacy as well.
Key Points to Ponder
A domain investing business could benefit from forming a limited liability company as its business structure. Aside from the fact that it provides protection and privacy by having the business as a separate entity from the owner, other asset protection plans can be applied to further maximize its advantages.
Remember to always treat your LLC as a separate entity to avoid creditors piercing through the veil. Allocate the right amount of money to your domain investing business. Do not over or under-capitalize to prevent future problems. Talk to an insurance agent to know which policy will best secure your domain investments. And if you have extra money to spare, set up a trust to further protect your assets.
Evaluate all your assets and assess which of these strategies you can apply to your domain investing business. Review state regulations, as they may vary about forming and maintaining LLCs and trusts.
Better yet, consult a financial advisor or lawyer before making any major business decisions. Although you do not wish for your business to fail, nor anticipate it to suffer from losses, it is best to have defense tactics in place against unexpected drops and slides.
On the flip side, even if you have all these preemptive measures for protection and privacy, you should not be complacent. While occasional slips may seem unavoidable, the most ideal strategy of all is still to avoid debts and losses.