Owners of family-owned and closely held businesses are for good and obvious reasons concerned about taxes. But sometimes the focus on legitimate and legal tax avoidance causes people to forget about asset protection.

This is where a Limited Liability Company or LLC can come into play. Without an LLC, a person’s property would be often owned in an individual capacity or in their living trust. And that can lead to unfortunate situations. For example, if the property owner is sued by a tenant for any reason, even something as innocuous as failing to return a security deposit, and the tenant obtains a judgment, however small it might be, that judgment is now a blemish on the individual credit rating of the property’s owner. That blemish will remain on your record for seven years. Moreover, that blemish can lead to higher interest rates or loan rejections, even if the owner of the property promptly pays the judgment amount. As a result, people who do own property individually may be inclined to settle with the tenant to avoid the risk to their credit rating that comes from an adverse judgment.

But even some accountants don’t adequately recognize the protections that LLC provide when a lawsuit relating to the property results in an adverse judgment. I have heard some accountants advise that an LLC is unnecessary, and you can safely avoid the costs associated with forming and maintaining an LLC because the risks associated with owning property can be adequately covered by insurance. But that insurance will not fully protect you from the risk of an adverse judgment. Many of you are no doubt aware that LLCs provide the benefit of asset protection. That is the most obvious benefit. If an LLC owns the property, the adverse judgment is against the LLC and not you in your individual capacity. Your credit rating is untouched. That’s the hidden benefit of an LLC.

As you can imagine, the scenario described above is not purely hypothetical. I have seen firsthand how the failure to set up an LLC turned a small claims court action into a black mark on someone’s credit that took years to remove. More generally, in the more than 20 years I have worked with clients, there have been numerous times where the presence of an LLC helped shield individuals and families from serious legal and financial consequences. Like any tool, an LLC has its time place. It is not a panacea. But it can play an important role in helping family-owned and closely-held businesses reach their personal and financial goals.