Basic Asset Protection

Asset Protection: Legal Entities

This is a basic overview to Asset Protection, and the various tools you can use to protect your wealth, your business and your assets. For a more in-depth explanation, contact me or see domestic vs. international asset protection.

The 3 Pillars of Asset Protection Planning

Privacy
Jurisdictional Law & Legal Documents
Control not Ownership

1. Jurisdictional Law is important for asset protection planning because this takes into account where the assets are held, or where the corporation was founded. Even though you are an American Citizen living in California, you can legally establish an LLC in Wyoming, or a C-Corp in Delaware, or a Trust in the Cook Islands, or an IBC in Belize. – And it may make perfect sense for you to do this!

2. Legal Documents effectively establish the ‘laws’ of your company within the confines of the jurisdictional law where the legal entity is incorporated. are obviously important. If you don’t have proper legal documents in place, a court can decide how to your company is effectively managed. In the event of a lawsuit – they may decide that creditors are entitled to liquidate your company – unless a strong operating agreement states otherwise.

3. Control Everything – Own Nothing. You never want to personally own large assets in your own name. If you do, you become a target. Ask any wealthy person – simply staying rich is a job within its self. Maintaining or preserving capital is oftentimes as difficult as making it in the first place. Governments, taxes, aggrieved business partners, ex-wives, children, frivolous lawsuits, all types of creditors are after YOUR assets. This is why YOU don’t want to own them personally, but you always want to maintain control.

Sole Proprietorship

Sole Proprietorship

A sole proprietorship is what you have by default when you start a business, unless you have incorporated and set up a corporate entity. You are solely responsible for the debts, liabilities of your business. There is no corporate veil of distinction between you and the operations of your business. If you are ever sued or go bankrupt – you AND your business will most likely lose everything.

These are relatively easy to report for tax purposes because you report everything on your personal balance sheet. It is easy to get a bank account, but it will be a personal bank account. If you ever buy real estate and you don’t place it in a legal entity, you have a sole proprietor ship.

ADVANTAGES: None.

DISADVANTAGES: You are personally liable for the debts of your business.

Bottom Line: Don’t operate as a sole proprietorship! Spend a few hundred dollars and get set up properly as a legal entity.

General Partnerships are not a legal entity that limits liability!

General Partnership

A General Partnership is what you have by default when you start a business with a partner, unless you have incorporated and set up a corporate entity. You are both jointly and severally responsible for the debts, liabilities of your business. There is no corporate veil of distinction between you and your partner and the operations of your business. If you are ever sued or go bankrupt – you, your partner AND your business will most likely lose everything.

ADVANTAGES: None!

DISADVANTAGES: If you and your business partner have a disagreement, it is difficult to separate the company. You are jointly and severally liable for the debts of the business.

Bottom Line: Don’t operate as a general partnership! Spend a few hundred dollars and get set up properly as a legal entity. If your venture is going to be a business, treat it like one.

An LLC with 2 Members

LLC – Limited Liability Company

The LLC is an extremely flexible legal entity that can be used for a variety of different reasons. What makes the LLC so flexible is that it can be:

1. member managed or manager managed

2. taxed as a disregarded entity, a partnership, a corporation/S-Corp

3. not as many compliance issues as a C-Corp

If you bankrupt, you can file for chapter 11 bankruptcy, and only your business would be responsible for the debts of the LLC if the operating agreement was written properly.

Other Variations of essentially the same are a Limited Liability Limited Partnership LLLP, Multiple Member LLC

ADVANTAGES: LLC’s provide powerful protection for your business, and are very flexible and inexpensive. It is highly reccamended that you at have at the very least, a LLC for your business. Nominee directors are not necessary in most cases. Your personal assets and business assets are separated, but you don’t have much privacy (unless you sign up for private LLC registration) Decently safe, but relatively easy to bring a lawsuit against your company when compared to an IBC, or a hybrid entity.
DISADVANTAGES: Outside funding, or additional members are not as easy to add or obtain when compared to a C-Corporation. Single Member LLC’s don’t carry as much Protection. If its going to be a single member LLC, it may be important to have a private LLC.

Single Member LLC

Commingled Funds allow courts to pierce the corporate veil of the LLC

Single Member LLC – Co-mingling funds / No Distinction between legal entity and person.

When you co-mingle funds, or you don’t run your business independently of yourself, you blur the line between yourself and your business. Effectively, this means that a court can pierce the corporate veil of your legal entity, and you will lose the limited liability status – you will again have personal, unlimited liability.

Remember, don’t own it, control it. Don’t take on personally the liabilities of your business, keep that corporate veil of distinction. Some States, such as Florida, have ruled that single member LLC’s are not separate legally from the manager.

ADVANTAGES: None! Don’t mix personal funds with business funds.
DISADVANTAGES: Single Member LLC’s don’t carry as much Protection. If its going to be a single member LLC, it may be important to have a private LLC.

With a Private LLC, We register your LLC and your name is kept off the State Records

Private LLC

Certain States allow for private registration of your Limited Liability Company, a private LLC

As your remember from the 3 pillars of asset protection, its important to maintain privacy, and keep your assets hidden as much as possible.

To get a private LLC, you need to have someone, like a registered agent, who can sign up the LLC on your behalf. This keeps you off of the state register, and makes your LLC private.

Remember, if your assets are harder to find, then your assets will be harder to take.
ADVANTAGES: Your name is kept off the State register. Only a few states allow for this type of registration but it is obviously very advantageous for a variety of situations.
DISADVANTAGES: none, but still not as effective as an international, multi-jurisdictional approach.

Corporations are ideal for raising capital and issuing stock, either privately or publicly.

Corporation

A C-Corp is what most people think of when they think of a legal entity. This is what your major, fortune 500 companies are all incorporated as – a C-Corp in the State of Delaware.

Large companies know the benefits of jurisdictional law, and over 90% of all C-corps founded in the USA are incorporated in Delaware. We have a registered office in Delaware and offer competitive rates. If you are looking to form a Corporation in Delaware, contact us today.

Banks and investors prefer large C-Corps over almost any other type of corporate set up. This is because the corporation is more stable, involves more individuals – and most of the time the focus is on growth.

ADVANTAGES: Can go public, shielded from liability, control is determined by shares.
DISADVANTAGES: Not very private, as your name is included on the state register. Reporting requirements can be tedious. Corporations require at least a President, Secretary and Treasurer. Also have to submit minutes, a corporate register and other miscalaneous requirements to stay in good standing. Also, may face dual taxation issue*s if classified as a C-Corp because you may be taxed at the corporate level and again at the personal level.

*A note on S-Corps

To avoid dual taxation issues, the IRS created an S-Corp filing designation, which will allow you to pass the gains and losses onto your personal tax filing and maintain the corporate viel. Filing as an S-corp this limits you to 100 members, also, there are some doubts as to the liability compartmentalization of this entity. You would not want to place a real estate portfolio in an S-Corp. Realistically LLC is probably a better option for most small businesses who aren’t trying to go public or raise significant capital.

Bottom Line: C-corps have their place, and its raising investment capital, they aren’t a huge use to personal financial planning or asset protection purposes.

IBC – International Business Company

International Business companies located in “offshore” jurisdictions often get a lot of unfair criticism.

People WRONGLY assume that if you go “offshore” you are trying to evade taxes.

For most individuals this is simply not the case.

Its not right for everyone, but if you are looking for maximum protection for your business, wealth and assets can benefit, an international asset protection plan might be right for you.

Entrepreneurs, high-net worth individuals, professionals, and Ex-pats can all benefit greatly from an international incorporation.

An international business company places your assets atop three very solid pillars:

Privacy, Jurisdictional law & Legal Documents, and Control

ADVANTAGES: .

These entities are hard to find. Your name is obviously not in a state docket. What are the chances your creditor goes looking for your name in Belize, or the Cook Island, or Hong Kong?
These entities are hard to reach – as your creditor will need to travel to country of incorporation to reach your assets.
These entities are still under your control. You are the manager and you control the actions of the IBC.

DISADVANTAGES: More expensive than domestic entities.

Bottom Line: If your assets are physically located in the United States, but are OWNED by and IBC in Belize that you CONTROL – then the creditor will need to travel to Belize to file a court proceeding against you…

This is just an example of a simple legal entity. None of these take into account one of the most flexible and useful tools in asset protection planning…

CLICK HERE TO VIEW PART II –> DOMESTIC AND INTERNATIONAL ASSET PROTECTION

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