Should you create another LLC to insulate hot assets from cold assets? The main reason to segregate assets into ring-fenced islands of brother-sister LLCs is to prevent a fire on one part of your business destroying assets in another part of your business.
Let us say you are planning to open a fitness center business. In this example, the business will operate out of a building that you own. Rather than putting these assets into the same “bucket” by only forming one LLC, it would be best to form separate LLCs to insulate the assets of the separate aspects of the business from each other.
First, you can form a manager LLC you call ABC Fitness Management LLC and name yourself as member and manager. This LLC is the actual fitness center business. This is a hot asset because people may get injured while exercising. In addition to insurance, to avoid these injured customers from taking your business plus the “sticks and bricks” and dirt it sits on, you should form a real estate holding company such as ABC Real Estate LLC to hold title to the property. You can name yourself member and manager of ABC Real Estate LLC. A lease agreement should be drawn up between ABC Fitness Management LLC and ABC Real Estate LLC, and rent should be paid to the real estate LLC every month. Revenue from membership and private fitness sessions could be paid to ABC Fitness Management LLC, which pays disbursements and/or a salary to you as a member.
This business structure is referred to as “brother-sister” entities (as opposed to “parent-child” or subsidiaries). In this example, the assets of the real estate holding business and the fitness business are insulated from the liabilities of each other. If a customer claims they were injured while using the exercise equipment owned by ABC Fitness Management LLC, they should not be able to obtain a judgment against the real estate holding LLC because it is a separate entity and did not cause the injury. Your personal assets are also insulated from the liabilities of each business. While you may have insurance to cover risks, sometimes claims are not covered by insurance or the insurance is inadequate.
Generally in asset protection, more LLCs are better than fewer. That way, a problem with one “hot” asset conducting activities should not expose the other “cold” assets that are passive assets with much value, including a building and land where that business conducts its activities.
This example above can be extended to almost any business, which can benefit from forming additional brother-sister LLCs to conduct activities or hold assets to further insulate against exposure to potential liabilities.