Will You Have
Too Much Equity
at Risk in Your LLC?
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.
| |
Call at (866) 306 - 0288 to Find out how to get Started Today! |
|
Which State to Incorporate In?