Waltham, MA asked in Estate Planning, Family Law and Business Law for Massachusetts

Q: I've read people should start an entity for asset protection, but do those entities need to generate revenue? if so how?

1 Lawyer Answer
Kas DeCarvalho
Kas DeCarvalho

A: I need to break this down a bit: Yes, it's a good idea to "start an entity for asset protection," but what people typically mean by that is that they wish to protect their personal assets from any liability related to their business venture. Therefore, they form an appropriate entity for the business venture, and assuming they follow the proper rules and protocols, the liability shield afforded to their personal assets is indeed effective. However, your question leaves me a bit unclear about the context in which you need "asset protection," (the begged question/missing variable is, "protection from what?") For example, if there's no business involved, a better vehicle might be to place the assets presumably needing protection into a Trust. So, while I don't think this is the question you're trying to get answered: No, your entity is not required to generate revenue in order to be effective as a liability shield. However, the IRS' general rule is that if your business doesn't show a profit in at least 3 of the past 5 years, it's classified as a "hobby," rather than "business." How the IRS/tax regulations intersect with the State's incorporation/organization scheme is an *extremely* good question...and getting into far deeper waters than I'm prepared to address in this forum.

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