ASSET PROTECTION BASICS WITH LLC’s
All Rights Reserved. No part of this publication may be reproduced or transmitted in any form by any means (electronic, mechanical, photocopying or recording) or by any form of data storage and retrieval system without the prior written permission from the copyright owner.
Disclaimer: The author and the publisher are not engaged in rendering accounting, tax or legal advice. Always consult a tax attorney and CPA prior to implementing any suggestions written in this manual. This material is not a substitute for legal or tax advice. Understand that your legal or accounting counselor may have little or no experience with the intricacies of asset protection.
Asset Protection through LLC’s is not taught in accounting or law universities.
We do NOT provide tax advice, tax opinions, tax strategies or tax shelters. Contact a licensed tax attorney and CPA in the state in which you reside if you need these products and services. Think twice if you're told not to consult with the IRS.
OBJECTIVES
This asset protection book discusses the following issues:
- Protect income and assets beyond the limitations of liability insurance.
- Increase awareness of the risks inherent in keeping assets exposed.
- Increase asset control and financial privacy.
- Increase awareness of certain business transactions that increase client privacy in financial counter-intelligence.
EXECUTIVE SUMMARY
Successful People Think about Litigation BEFORE It Happens. Are you prepared?
Asset protection is a process of protecting estate assets
against attack by creditors and lawsuit judgments.
A Limited Liability Company is a legal form
of business company offering limited liability to its owners.
The Limited Liability Company (LLC) benefits in asset protection:
1 Reduce the incentive of getting sued in the first place
2 If you are sued, make sure your personal and business assets are protected
3 Extinguish the claimants’ economic incentive to sue
4 Utilize the LLC to provide a level of asset anonymity guaranteed and protected by state law
5 Make yourself disappear from information databases and unable to be located
6 Insulate your assets from each other so they are not lost in lawsuits
7 Increase bargaining power with creditors
8 Make collection on judgments difficult
9 Minimize the financial, emotional, and time consuming risks of lawsuits
KNOWLEDGE IS POWER AND IGNORANCE IS EXPENSIVE.
The Limited Liability Company (LLC) has become a powerful tool for accomplishing asset protection goals. The LLC is the most flexible and convenient way for operating a business,
isolating dangerous assets, owning high lawsuit risk investments (rental property, restaurant, medical practice) , while achieving financial privacy.
TABLE OF CONTENTS
Chapter 1
The Legal System can make you a target for lawsuits
We live in the most litigious country in the world.
A new lawsuit is filed every 30 seconds.
You have a one in four chance of getting sued next year.
If you are successful and perceived as wealthy, you are a desirable target for a lawsuit.
You are three times more likely to have a legal situation than
to spend a night in a hospital. Most people reading this have health insurance to protect themselves against a medical crisis yet few have structured themselves to protect against an attack on their assets:
homes, vehicles, yachts, planes, real estate, insurance policies, businesses and other investments. Without Asset Protection, you have effectively painted a big red bull’s eye on yourself and your business and made yourself a target for multiple lawsuits. If you generate high income (doctors, lawyers, CPA’s, business owners) or have significant assets (real estate, businesses, investments) and have not structured yourself properly through asset protection, you have a higher probability for attracting law suits.
Litigators accept cases contingent on the probability of winning the case, obtaining a settlement amount and upon the defendant’s ability to pay. Attorneys assess the defendant’s ability to pay after conducting an asset search using easy to find information, such as the defendant’s name , approximate age (45-60 years old), and geographical location (50 mile radius of Miami). Even when no assets are found, a professional may be automatically targeted due to their capacity to earn income.
The reality of our legal system is that defendants are named in lawsuits not because of fault, but their ability to pay - Can lawyers collect settlements from your assets?
If your assets are visible and unprotected, you will attract lawsuits.
If your assets are invisible and protected, you will repel lawsuits and attorneys. Attorneys will move on to the next easier target.
Defending yourself against litigation is expensive, time consuming and a hassle.
Loosing a legal battle can cost you, and your family, your entire estate.
How anyone can find out what you own - ACTION ITEM
FINDING ASSETS IS SIMPLE, QUICK, & EASY
Attorneys and Private Investigators subscribe to online services that list real estate, vehicles, planes, and watercraft in your name and it takes about 15 minutes to run a report on the internet. Other online sources will reveal bank and brokerage accounts. After running a simple report, an attorney will decide whether or not to go after you (or your relatives) or not. The merits of a case are a secondary factor compared to the ability to get paid. The attorney may take the case on his own nickel (contingency) if he locates a target with DEEP POCKETS.
RECOMMENDATION – LET US PERFORM AN ASSET SEARCH ON YOU TODAY!
This way you can see what attorneys see about yourself when they are sizing you up for a lawsuit.
Chapter 2
ASSET PROTECTION MAXIMS:
1. Control assets without owning them in your own name.
An effective asset protection plan enables a person to control assets without linking them to identifiers, such as a name or social security number, that gives away the location and ownership of the assets. Assets can be owned by corporations and LLC’s and controlled and used by you.
2. Make the assets unattractive to the hostile litigator.
You can make financial holdings, real estate, and other assets unattractive to the litigator by making them liable for federal income taxes on income not yet received. Making any judgments uncollectible also makes them a tax liability to the litigator. “Charging Order” protection can be combined with financial privacy for effective asset protection.
Details in chapter 3
3. Decrease Litigation Impact by creating Multiple Entities
The best strategy for reducing litigation exposure is separating assets into multiple LLC’s to protect each one from each other in litigation.
- A doctor owns 5 clinics and a testing lab and places them in separate LLC’s. A patient sues one of the facilities, the other facilities will not be brought into the litigation because they are separate entities. If the doctor owned them as a sole propitiator or in a single corporation or LLC, the doctor may risk the loss of all 6 facilities.
- A business owner has an oriental food market, two sit down Chinese restaurants that also deliver, and a catering business for banquets and weddings. Each of these four businesses are in separate LLC’s. The delivery person is rushing around town delivering Chinese food orders and commits vehicular homicide. Since the other businesses are owned by separate LLC’s, they are not liable entities. If the businesses had a common owner (individual, corporation, or LLC), their assets could be brought into the lawsuit.
- A real estate investor owns 20 rental properties including single family homes, duplexes, and apartments and places them in separate LLC’s. A tenant injures themselves at one property but is only able to sue the LLC that owns the property since the other properties are separate legal entities. If the properties had a common owner (individual, corporation, or LLC), their assets could be brought into the lawsuit.
4. Protection from Insurance Limitations
Every insurance policy has exceptions, limits, and exception clauses to minimize risk to the insurer and further expose you (the insured). LLC’s can limit your liabilities and protect your assets if structured properly.
- Your insurance coverage is $10 million but the jury awards $48 million for
an accident that takes place at your office or property. Without asset protection, you could loose everything.
5. Four key minimum requirements for valid LLC’s
- Have at least two members
- Be taxed as a partnership
- Be managed by a manager, NOT the members
(Managers can be people or another business)
- Have a profit motive (invest in real estate, CD’s, stocks, businesses)
NOTE: There are many LLC’s paper mills in the industry that sell sham LLC’s.
Make sure your LLC meets these minimum requirements for validity.
Chapter 3
What is a Limited Liability Company (LLC)
and how does it provide Asset Protection?
The Limited Liability Company (LLC) has become a powerful tool for accomplishing asset protection goals. The LLC is the most flexible and convenient way for operating a business,
isolating dangerous assets, owning high lawsuit risk investments (rental property, restaurant, medical practice) , while achieving financial privacy.
LLC’s were created by state legislatures to create a legal entity to avoid the tax and business problems found in corporations and partnerships. The LLC provides the liability protection of a corporation without all the customary paperwork and reporting. The corporate principle officers and shareholders are routinely sued whereas the shareholders of LLC’s are protected from lawsuits.
Wyoming (1977) was the first state to pass a Limited Liability Act and introduced the Limited Liability Company (LLC) to business. Once the IRS determined that the LLC had partnership (or pass-through) tax status, the remaining states created their own LLC laws.
LLC Taxation:
Single Member LLC’s
LLC’s with only one member are disregarded for tax purposes and the income and expenses are reported on the individuals Form 1040. The single member is treated as a sole proprietor. If a corporation is a the single member, the LLC income and expenses are reported on the corporations’ returns with Form 1120 or Form 1120S.
Multi-Member LLC’s
Multi – Member LLC’s are taxed “pass-through”
as a partnership and file Partnership Tax Return Form 1065. Income and expenses pass through the partnership directly to the partners. Each partner takes their share of income and expenses determining each individual partner’s individual tax liability.
Partnerships have partners LLC’s have members
Ownership in the LLC is the “member interest.”
LLC Limited Personal Liability:
When hostel creditors sue a corporation, typically they can only take the assets of the corporation. Generally, stockholders are not liable (have “limited liability”) for the debts, liabilities and acts of the corporation.
Notice that in a partnership, all partners are jointly and severally liable for everything chargeable to the partnership.
If a supplier or creditor comes after the LLC, they may not go after the member’s house, car, or bank account, which limits the personal liability of the member.
Corporations Partnerships LLC’s
Corporations have stockholders Partnerships have partners LLC’s have members
Stockholders have limited liability Partners have joint liability Members have limited liability
Taxed as a Partnership Taxed as a Partnership
The LLC members have the limited liability of a corporation.
The LLC members are taxed as a partnership.
LLC KEY BENEFITS
LLC’s have the pass-through taxation of a partnership
and
the limited liability of a corporation.
Corporations LLC’s
Have one or more Have one or more
Directors or Officers Managers
Hostel creditors can take Hostel creditors can take
stock if proven you own it member’s economic interest
through the courts by
obtaining a charging order
When a judgement is awarded against an LLC, it may be levied, and the LLC’s property seized or sold for payment.
When a judgement is awarded against a member of a LLC. to the extent that the operating agreement so states, distribution usually can not be compelled to satisfy a member’s judgement debt. Creditors have to satisfy themselves with a “charging order”. This gives them the rights to any distributions made by the LLC to that particular member, but little else. Once the charging order is obtained, the hostile creditor is now first in line for any future distributions that are usually paid out to the member(s).
Wyoming Statute 17-15-145. Rights of creditor.
“…the charging order is the exclusive remedy by which a judgement creditor of the member or transferee may satisfy a judgment against the member’s interest in a limited liability company.”
LCC’s Complement , Supplement, and Complete Insurance Protection
LLC’s can act as a form of supplementary insurance. The “limited liability” may protect what the insurance does not.
Insurance may not pay:
- a claim based upon the commission of an intentional act or one resulting in punitive damages. The intentional act may even be committed by someone other than yourself like an employee or family member.
- the amount of the claim may grossly exceed the policy limits.
Making LLC Assets Unattractive To The Creditor
The LLC Manager can refuse to distribute the earnings (if provided for in the operating agreement). When a creditor enters a charging order against a member’s earnings, the creditor is immediately responsible for taxes on the income distribution, whether the creditor receives the distribution or not. If no income distribution is made to the creditor, the creditor is still responsible for taxes on the “phantom income”. Since being taxed on income not received is a negative, this produces a better negation position for the member for settlement.
Requirements for valid LLC’s
- Have at least two members
- Be taxed as a partnership
- Be managed by a manager, NOT the members
(Managers can be people or another entity - partnership , LLC, corporation)
- Have a profit motive (invest in real estate, CD’s, stocks, businesses)
Manager of LLC
oversees the
LLC
which has 2 or more Members
Member #1 – 50% Interest Member #2 – 50% Interest You Other entities
Other entities could be family members, individuals, partnerships, LLC’s, corporations.
Two or more members own interest in the Manager Managed LLC and their total interest adds up to 100%.
LLC Earnings and Deductions Distributions in light of Charging Orders
Manager of LLC
distributes the earnings and deductions to LLC Members according to their respective interest
LLC
which has 2 or more Members
Member #1 – 50% Interest Member #2 – 50% Interest You Other entities
Charging Orders frustrate Hostile Creditors
A creditor of a Member in an LLC is supposed to be limited to getting a charging order against the distributions of the member. As a result, the creditor cannot acquire the LLC interest of the debtor and therefore cannot acquire the assets of the LLC. As a result, the creditor traditionally has to wait until the manager makes a distribution in order to get paid. Of course, in most cases the manager has authority to delay distributions. In the meanwhile, the creditor has to pay the tax which would normally fall on the debtor (on income yet to be received).
If a lawsuit against you is won and the hostile creditor obtains a charging order against your distributions, the LLC Manager may restrict distributions according to the operating agreement.
Since the LLC’s Manager may not make the distribution of the member’s interest, all the hostile creditor has earned in the charging order process is a tax liability on “phantom income” (income never received). This will dampen the hostile creditor’s motivation to pursue a charging order and they may either drop the case or settle for pennies on the dollar.
LLC’s afford a significant degree of protection for the members against the internal liabilities of the LLC, yet they also severely restrict the collection rights of the creditors of a member.
THE LLC Manager
You (or your family members) control the LLC that owns the assets. The key is to obtain a person to head the LLC as the manager. Because you’re seeking privacy from the public record, this means that you (or your family members) should not serve as the manager. This role should be reserved for a person other than yourself or your spouse.
Friends as Managers
Friendship and money do not mix. Most people have learned this lesson the hard way.
Hiring a Professional Manager for your LLC
The professional manager works to protect the interests of the members and the LLC itself. This enables you to stay off state records and off the records of database resellers. We provide this service after forming the LLC.
What should the Manager do?
· The manager signs the articles of organization in the filing of the LLC.
· The manager signs liens, under your direction, against property and other assets.
· The manager is available by phone, fax, and email to answer questions and correspond.
· The manager DOES NOT own or control the company.
· The manager is hired to perform a service
LLC Asset Protection Maxims:
Taxed as Partnership
At Least 2 Members (or more)
Manager Managed (not member managed)
Established for profit (not merely to hide or protect assets)
Registered in every state where business is conducted