Assets Protection: Don't Put all the Eggs in the Same Basket

Would you drive a car without insurance? Would you buy a home without insurance? Then why would you buy insurance for your investment? Well, most of us never know that, we can buy insurance for investment. It is one of the key point that distinguish professional investor and average investor. In technical term, insurance for investment is called "covered". Often when we heard investor saying that their position is covered mean they have insurance of their investment against the up and down of the market.

There are basically 2 types of insurance: the one we can buy like for a house, and the one that we need to learn. The insurance that we need to learn can be best explained by the old saying of "do not put all your eggs in the same basket", metaphorically means, assets segregation is essential in our current litigious world.

Entities such as limited liability company (LLC), limited partnership (LP), C-Corporation, S-Corporation are good to be used for assets protection. By owning your assets, let's said your 4-plex, under these entity, you are in this context segregating your asset. To best illustrate the concept, let's us take a look at the following example:

1. If you owned all your assets under your own name, when come to the case of one of your rental property stair case broke down and your tenant had injured, he or she will sue you. In the event of he or she succeed the court case, he or she can claims not just the rental property but your other personal belongings. It is like you are holding all your egg in the same basket, in the event of the basket drop down or has a hole on the bottom, all your eggs are gone!
2. If you owned your assets under different entities, you are making a firewall against any predatory law suit to your personal belongings. The entity will limit your liability to the extend of assets under the entity when come to any court case. The plaintiff does not has the claims access to your other assets at other entities considering the case 1. It means, worst to worst case, you only lose what is under the entity which is being sued. It is like each egg is putting different basket, if one basket is lemon, other egg and basket is not affected.

The bottom line is, that owned nothing under your name, but by legal entity. It is what the riches do, owned nothing but control everything!