One of the biggest mistakes I have found over the past 23 years is clients who sometimes have that false sense of security thinking they are totally protected with one legal entity.
Unfortunately, I have seen clients lose control of their companies, their personal assets, and even control of their operating business. The goal is to give you the strategies to plug up any gaping holes you may have in your shield of protection to your current and future assets.
Let’s review the basic’s. The first step is to separate your personal and business assets.
That means not operating as a sole proprietorship and forming a separate legal entity like an LLC. Nevada offers an extra layer of protection when it comes to protecting the entity veil and making it harder for someone to come through to your personal assets (assuming you were the owner of the entity).
The next step is to separate your “Safe” from “Risk” assets. Most take the first step to separate their “risk” assets by forming a separate legal entity. Shortly we will cover how to add more separation for your business.
Many forget to form a separate legal entity to protect their “safe” assets, like gold, silver, stock in the stock market (even your cryptocurrency)…where there is no direct liability to you. I believe the reason for this is most think they do not have enough safe assets to protect.
There is no magic number, like once you achieve $100K in safe assets (outside your retirement plan) you need to form a separate LLC. The key question to ask is, “How would you feel if you lost all safe assets to a lawsuit, or action by your creditors?”
If you had $40K of investments unprotected, that may be very important to you, if that is all your safe assets. Also, if you have ownership interest in a business, you may be worth millions, but if you own it personally or by your living trust (which is protected from probate, not liability) you may lose control of that safe asset also!
If you own real estate outside of your principal residence, that should be held by a separate legal entity. It should not be owned by your safe asset holding LLC or by your business operating LLC. To this point your asset protection structure should look like the following diagram below.
Notice that the living trust is owning the membership interest in each LLC, which is ok because the LLC provides the “charging order” protection which is a legal remedy that only (typically) allows the creditor to receive an “economic interest” in distributions from the LLC, not a management interest in the membership interest that controls the company. Now, with the charging order and the living trust connected, you have the best of both worlds.
I find that most seem to forget that if you form an S or C corporation (except in Nevada, which is the only state that has the “charging order” protection for corporations) and you are sued personally for something unrelated to the operating company, you could lose control of your entire company AND ALL the assets of the company, including ownership to your website, bank accounts or any other assets titled to that company.
Many seem to forget even who their website is owned by, which may be their biggest assets they lose control for any online marketer.
The key part is to ask the question: What would happen if my business was sued at the operating level? Do you have any type of business liability insurance to handle the first hit?
Most small businesses owners do not have any liability insurance. This means if your business is sued, your business is on the hook for all the legal fees to defend the business.
You could lose all the assets, domain names and bank account balances in the lawsuit. The good news is your personal assets should be protected because of the separate legal entity.
The second important question becomes: What would happen if you were sued for something unrelated to the operating business at the personal level? Would you lose control of your company? Would you have a new business partner in your company? This is why so many business owners are vulnerable as a corporation where you own the stock personally.
The first strategy involves the use of Single Member LLC’s disregarded for tax purposes to accomplish two goals:
1: to isolate liability to the main operating business (the main assets) and 2: to reduce your federal tax return expenses ( a single member LLC does not have a separate federal tax return due when it is taxed as a disregarded entity vs. an LLC taxed as a partnership would have a 1065 due federally which may be $400-$800 each).
In our example,e the husband and wife have an internet marketing business and realize they do not want all their eggs in one basket with their growing business.
It is typical if you are a speaker from the platform that would be a separate legal entity, also, if you put on your own events that would be a separate legal entity, and your coaching program would be a separate legal entity.
Each business has its own level of liability and forming a separate legal entity for each to isolate liability is a smart move. You may want all the profits and losses of each business to flow to one entity for tax purposes to simplify the tax structure.
Ideally, the individual owners will have a living trust set up for estate planning purposes to complete the planning. In this strategy make sure you separate each LLC for each business on all the websites, bank accounts, credit cards… to run them as separate legal entities.
Let me share a story that shares the purpose of this diagram below. A couple of years back, I had a client from Hawaii who had a very successful flooring business doing about $3 million per year in annual revenue. He had a partner and they operated under a Hawaii LLC taxed as a partnership.
The one partner was involved in a high profile divorce and the spouse (non-partner) engaged in the charging order, again the LLC as one of the assets involved in the divorce.
Even though the charging order protected the LLC’s assets, that spouse was able to subpoena all the business records of the LLC to determine if any expenses were hidden or going to other companies that the spouse had control of. This was very disruptive to the operating entity. Although the charging order did its job, this was disruptive.
When the partner finalized the divorce and moved to Las Vegas to open a similar business with his same partner, we added a protection layer at the ownership level.
Each owner formed a separate LLC to hold only safe assets, and the safe asset it would own was the ownership interest in the operating company. NOW, if either partner had a legal issue, personal, or another divorce, instead of a charging order against the ownership interest in the operating
company, it would be a charging order against the safe asset holding LLC.
This would insulate the operating business from any legal issues with any of the owners.
This same strategy works well with an investment group, with many owners, to require each owner to have their own separate LLC to own the investment fund’s ownership. This would help avoid any disruptions to the investment fund.
In this example, the flooring company may have different divisions, each with its own product line, and a single member LLC may help with the other structure for each division for liability reasons. See the diagram below.
In conclusion, a multi-tiered approach is a very powerful, yet underutilized strategy that can often be the difference between growing your net worth and not having any at all. It is not if you will be sued, but when. The more protection will help you keep more of your assets for you and your family.
Need Strategy Help with Your Structure or Situation?
Learn more about hiring Scott Letourneau for a strategy session.