I don’t know if there will be a recession, nor if there will be a broad move by banks to deal with risky loans. But I do know there’s enough uncertainty to create a critical need for awareness of asset protection. Here are some guidelines to guide you through these uncertain times.
One of the things we’ve seen recently is the erosion of some protections normally afforded by limited-liability companies (LLCs). Some courts have said if LLCs are treated as an extension of your personal assets versus true business assets, you may subject yourself to additional scrutiny. The general law is that LLCs provide the same liability protection as corporations. Historically, if you comply with the statutes, you are fairly safe. LLCs don’t have a lot of required compliance. The twist has been the overuse of single-member LLCs as disregarded entities which don’t require a separate tax return. You don’t want to blur the lines; always make sure you are treating LLC assets as if they are truly separate and distinct from personal assets. Don’t move assets around between the entities, and avoid loans versus true equity contributions.
LLCs allow you to have three types of management: 1) manager managed, which can be one individual; 2) board management, which is very much like a corporation; and 3) member managed, in which the shareholders manage. Whichever one you select, make sure you follow the statutory guidelines.
The next issue of concern is which assets are in the company, whether it’s an LLC or a corporation. The first asset that comes to mind is the intellectual property. I have been a proponent for years of putting the intellectual property in a separate entity to protect it for future use. This is accomplished by using an arm’s-length license agreement between an operating entity and the IP-holding company. This structure not only provides protection, but allows for creative tax planning, specifically being able to move income out of high-tax states.
In effect, this structure keeps some value or goodwill outside of a troubled operating company and hopefully monetizes it with some degree of recovery. This is true if the name itself has a lot of collective goodwill. If you have any doubt as to this strategy, look at some of the brands that have resurrected themselves from troubled operating situations, such as Chi Chi’s and Bennigan’s.
Another asset protection question is whether to keep individual stores in separate entities or group them together, such as by geography. If you are a franchisee of two or more concepts, you will be required to keep concepts in separate special-purpose entities.
There can be an advantage to separate entities. If there is a major incident in one restaurant, you can protect your other restaurants in different entities from claims or liabilities of that troubled entity.
Regardless, use a holding company to hold groups of individual stores. If you are a corporation or LLC, or even a limited partnership, a holding company that owns individual stores in their own entity offers protection. In addition, you can avoid multiple tax returns and use consolidated GAAP financials.
Another important element in asset protection is your insurance program. In addition to the typical insurance for property and casualty, which is important in protecting operating assets, don’t forget about securing broad and deep cyber coverage. Carry employment practices relationship coverage to mitigate issues related to discrimination or other potential claims. Some of these claims may be class actions you have been brought into. If you can get some coverage, make sure it includes class-action matters.
Another technique is to keep operating assets light. This means minimizing operating business assets you own so they are unencumbered. For instance, a substantial use of equipment leasing or landlord-owned equipment, furniture and fixtures. I have seen investor money used to acquire this personal property in order to have actual ownership with a separate lease. These are all techniques that dissuade outside parties from attempting to bring an unreasonable claim.
A technique I’ve used for years is the use of a management company. Put key above-store employees in the management entity and charge a reasonable management fee to the operating entities. This will facilitate to move the management fee to a separate entity away from the operating entity. Also, with some clever structuring, you may even be able to use a fiscal year for the management company to move income between tax years.
Finally, the cash you are accumulating at the operating-company level should be moved to the holding company and if possible distributed out. For most cases, reasonable distributions are safe as long as you can pay your bills and there’s no issue of insolvency.
Just to emphasize one more time, particularly with the use of single member LLCs, follow all corporate formalities and treat all related transactions at arm’s length. That much is a certainty in an uncertain world.
Asset protection is an ongoing process and something that’s particularly necessary in the restaurant world. Just make sure you’re discussing these issues with your trusted advisers, from bankers to accountants to lawyers.
From the November 2025 issue of Restaurant Finance Monitor
