Remember
we said that your corporation should have little or no assets at risk
when it is doing business with the public? Why was that? If the corporation
gets sued for doing business with the public then it can lose all its
assets potentially.
The same
result can happen for an LLC. Remember the difference with an LLC is
when a lawsuit occurs from an individual level. Let’s suppose you
transferred a piece of rental property to an LLC and there was $100,000
in equity in that rental property. What would happen if you were sued
personally?
You would
be protected because of the charging order protection (if the LLC was
taxed as a partnership and there was no fraudulent conveyance). What
would happen if someone tripped and fell on the property and sued the
LLC that owns the real estate? The LLC has $100,000 in equity at risk.
In other words it could lose all of its equity! What should you do?
One solution is to place a second mortgage on the property by a second
LLC (which makes loans). The name of the asset protection world is to
remove assets from business operating entities.
Separate
Your Safe Assets From Your Risky Assets
Now, there
is a concept in asset protection that says to separate out your risky
assets form your safe assets. For example, if you had a rental property
in an LLC, the rental property is a risky asset. You do not want to
then place your investments (safe assets) into that same LLC, because
if a lawsuit develops from the rental property you can lose your safe
assets (your investments)! It is best to separate your risky assets
like rentals into their own LLC and have a different LLC for safe assets
like your investments.
Are
(Nevada) Corporations Effective
as an Asset Protection Tool?
Many other
incorporating companies in Nevada promote corporations as a tool
to protect your assets. That is not the function of corporations.
The main function of a corporation, whether it is in Nevada or anywhere
else, is its ability to insulate personal assets against liability.
Basically, when you get sued as a corporation operating your business,
your personal assets are separate and can be protected. The challenge
is that a corporation is not always an ideal vehicle to protect your
personal assets.
There
are two Major Drawbacks of the
Corporation as an Asset Protector:
1. The
transfer of assets to and from the corporation may carry tax implications.
Yes, you can transfer assets into the corporation tax free under IRC
351, but you must take back 80% of the stock. In other words, you are
trading one asset for another and are really no better off than when
you started.
2. Creditors
of a stockholder can claim the shares you own or any obligations due
you from the corporation. The corporation actually has marginal use
in wealth protection. Did you ever consider this happening to you? If
you get sued personally, and own 100% of your corporate stock,
you lose your entire company! Even if you own a small percentage
of stock or have loaned money to a corporation you can lose that by
a personal lawsuit or creditor going after you! How are most of us most
likely to get sued personally? What is the one thing just about all
of us do? We drive cars! Did you know the one thing that insurance companies
will not cover in an automobile accident that could cause
you to lose all your assets personally? Do you know the tools that
can prevent that from happening and it is not a Nevada Corporation?
It’s the limited liability company.
Keep in
mind the corporation is a key component of your overall asset protection
plan, but keep in mind it does have limitations.
Do Nevada
Corporations have any special advantages as opposed to forming
one in your home state when it comes to asset protection? Yes and no.
Nevada
is the most difficult state in which to pierce the corporate veil, which
is a major reason most knowledgeable companies now incorporate
in Nevada first even though they may have to register to do business
in their home states. When it comes to pure asset protection, the answer
is no! Yes, Nevada is much harder for a creditor to get to first base
and trying to determine who the stockholders are, and that may be in
a benefit in a frivolous lawsuit, but when it comes to a serious big
time lawsuit, it will not be much different.
Unfortunately,
many companies in Nevada that promote Nevada corporations promote them
as a magical asset protection device that will save you from
any situation even a situation where there is fraudulent conveyance!
That is simply not true. There are different tools to accomplish different
things. Be cautious of companies that primarily promote just Nevada
corporations, because it is not the cure all they make it out to be.
You
are welcome to call our office directly for a FREE consultation at (888)
466-7566.
