Properly protecting your hard-earned money is perhaps one of the most important factors often overlooked by many successful business owners today. We want to make sure that everything we worked for, the many hours building the business, countless hours of late nights being away from the family, and long weekends is something that we need to remind ourselves of which is why it is critical to structure proper protection. As a general rule, you may only be at fault 1% and be liable 100% for all damages.
Let’s look at the hypothetical scenario below that gives us an idea of how we can protect the assets inside of a corporation regardless of its size or revenue business is generating. Remember, large businesses such as IBM, Microsoft, DELL and many other corporations have the same rights as your legal entity. The only difference between your corporation and theirs is that they are publicly traded company. All the laws and rules remain the same for both of you.
EXAMPLE:
If you have an entity, (VIRGIN SOIL Corp. (fictitious name)) that can be C Corp, S Corp or an LLC that you operate and has a potential of a lawsuit. The company builds product parts for airplane. Let’s refer it as an operating entity because that’s where her entire business is operating under.
The question we always have to ask ourselves is: would you be open to liability for any reason. The answer is YES, your entity is always open for a liability/potential lawsuit. This is why it is strongly recommended to do the following:
It is encouraged for the person to set up another, new and separate entity (Corp A), that will keep all the equipment in it. Nothing but the equipment!!!
We encourage you to form another entity (Corp B), that will keep all the real-estate in it. Nothing BUT the real-estate!!!
We will have formed another entity (Corp C), that will keep all major working capital.
The last entity (Corp D) that can be formed for the purpose of this example will be handling payroll. Now, this entity will keep the funds for only 30 to 40 days. What that means is that you will ONLY keep enough money for salaries worth of 30 to 40 days ONLY; Not more!!! The higher the amount of capital in your payroll account, the more your entity is open to potential lawsuits. It is important to understand that these are NOT parent companies or subsidiaries. Each of these entities are completely separate and independent legal organizations. Think about it as braking up the entire company into several smaller pieces. Now let’s say something happens, there is an accident or a dispute of some kind which resulted in a lawsuit.
Question 1: What can the person suing you go after?
Answer 1: They can only go after what’s inside of the VIRGIN SOIL Corp.
Since the company has been broken down into smaller pieces, the money, salaries, equipment, and real-estate are in different (completely separate) entities that are NOT directly associated with VIRGIN SOIL Corporation.
Question 2: Can the person suing VIRGIN SOIL Corp. go after real-estate (Corp B), money – major working capital (Corp C), equipment (Corp A)?
Answer 2: NO, because they are not an asset of VIRGIN SOIL Corp.
Think about them as a completely separate entities that have no direct association with VIRGIN SOIL Corp. VIRGIN SOIL Corp. does business with all of these entities but the money is not laying inside of that one entity that operates the entire business. In this example, the person suing will only be able to get what’s inside of it which will be next to nothing. We want to make it appear that we are broke and the VIRGIN SOIL Corp. has no money.
We also strongly encourage each of you to always have written operating agreements between each of these entities even if the business does not generate any revenue, because remember you are doing business with all of these entities just like many other businesses. It is not required but strongly recommended and extremely important. Why is it a good idea to do it? Because it shows that each of these entities are separate businesses trying to do business. By having an operating agreement in place, easily verifies business activities.
Question 3: How do I move the money from one entity into another?
Answer 3: You simply wire the funds from one entity to another. Make sure you keep good records of all financial transactions as you want to be able to justify all of your actions.
None of the large banks, firms, and institutions are keeping the fund in their entities. They are moving the money into other entities described in this example and it is 100% legal. We need to recognize that we are NOT hiding the money, and we are also not doing this to avoid taxes. Actually, your taxes maybe just a little higher with this structure BUT this is about PROTECTION not about the TAXES.
We need to keep enough money in VIRGIN SOIL Corp. Corporation to be able to operate the business for 30 days and be able to operate on a daily basis.
We want to keep everything in separate entities to be fully protected.
This may or may not be beneficial to everyone, especially when you are a startup and smaller business but as soon as you start expending and reaching revenues of 1,000,000 and more, it is strongly recommended to get the best protection there is. You, of course, do not want to have parent companies and subsidiaries. All of these entities will be segregated since they are completely separate entities not related to an entity that keeps operating the business.
There are only two possible ways to lose protection with this structure:
A: If someone commits a fraud.
B: Tax invasion.
We all know, none of this will be an issue. This is only a part of the BEST prevention you can create for your business today based on our knowledge. Has your mind started to open up yet? Perhaps now you get a better picture of why some of the companies have 5, 10, 15 businesses when they file for taxes. They are protecting themselves just like we should. Do not have a C Corp, LLC or a S Corp as a parent company to your main entity with subsidiaries underneath otherwise you are exposed to a potential lawsuit. Another tip for good protection is to have ONE LLC per piece of real-estate. Many attorneys strongly recommend having only one real-estate per LLC, unless it is an operating real-estate.
If you continue to accumulate real-estate you DO NOT want to have two or more properties in one entity. Why is that? Let’s say a tenant in one of these properties file a lawsuit one day for whatever reason; if he or she will win a lawsuit he can go after all of these properties and you may lose all of them. If you have only one property inside of an entity, they can sue only what’s inside of that entity. Some investors have the amount (example $1,000,000) per entity, meaning they may have several properties not exceeding one million dollars. As they reach that mark, they would create another entity and continue pacing new real-estate in it.
There are also some advantages of secondary residence:
If you cannot prove that you live in the property at least 1 day more than half a year you are not a permanent resident.
Proper planning in early stage plays an important role structuring your legal entity(s). Although there is additional cost involved, and lots of work at the beginning, it is well worth doing it. You will sleep better at night knowing you are fully protected in the event of a lawsuit. Lastly, based on our knowledge both Nevada and Wyoming offers the best protection when it comes to legal entity formation.