Segregation of Business Assets

This is the concept of allocating out different assets into separate entities on a risk vs non-risk basis.

(1) Proper Ownership

Do not use your name when creating an entity, instead create an LLC to have ownership in your business entity. Also, use a business PO box or address (as allowed) or an agent for you, such as an attorney, CPA, etc.

(2) Example #1

  1. A company owns rental properties under a separate LLC
  2. The LLC that owns the rental properties is a property managment business
  3. There is a separate LLC that owns and rents vehicles and equipment used in the business and contracts to do services for the rental company.
  4. The rental company contacts this entity to provide services for property owners
  5. So the idea is that each entity is liable for its own debts and risks.

(3) Example #2

You wish to set up a new LLC that you will contribute assets to and that will allow you to continue business

You currently own:

  1. $50,000 cash in a personal checking account at a bank
  2. $100,000 debt free investment farm land (inherited from parents)
  3. $350,000 principal residence value debt free (no mortgage)
  4. $200,000 in an IRA
  5. A free and clear $20,000 truck
  6. You and your wife each own a $25,000 lexus, one is debt free, one is subject to a $15,000 bank loan. Value at $25,000
  7. You have a property managment business (C Corporation) that generates $100,000 profit per year after you take a $75,000 salary

So one idea as to how to capitalize the new LLC

  1. Contribute $30,000 of your cash
  2. Contribute $100,000 farm land
  3. Principle residence: In Arizona the Homestead Exemption is $150,000, so the take home value of $350,000 and you can sign a promissory note in favor of the LLC secured by a $200,000 first lien and Deed of Trust on the residence bearing 6% interest (interest payable annually with a 6 year maturity date). This is part of your subscription to purchase membership interests in the LLC - evedenced by a promissory note. 
  4. Contribute the debt free truck and one of the automobiles that is debt free
  5. Contribute the stock of the property mangaement business into the LLC

Now you have capitalized the company with assets that you can borrow against to do your business.

(4) Example #3

Say you want to go into a house buying, repair, and renovation business:

So LLC A that you first capitalized can lend $ to LLC B that you form to buy the fix up houses and LLC B will sign a promissory note in favor of LLC A and will secure the note by a deed of trust on the fix up real property so that, should a liability occur on the rental property and a judgment be rendered against LLC B, holding ownership of the property, you can call the note all due and payable and foreclose the property; either get the property back or your note gets paid off at a foreclosure sale (not applicable to a tort situation, i.e auto accident, etc.).