We begin the process of acquiring assets at an early age and by the time we are in our 40’s, or even sooner, our assets provide us with a means of survival. Some of us who start businesses add to these assets and our net worth grows and grows. The two key questions that loom over our life however is : what do we do with those assets to best benefit our business and personal endeavors and how do we protect those assets from others? Failure to address these questions properly can cause us major losses and even affect our next generation.
Studies show that a lawsuit is filed in America about every 30 seconds and about 25% of individuals will be sued in their lifetime. 94% of lawsuits occur in the United States, so your chance of litigation is greater than you think. As a business owner and homeowner, you want to focus on asset protection and estate planning. This column will only give you the “tip of the iceberg”, but should guide you toward your goal of maximizing your assets. Competent legal counsel should be retained to make any planning and protections legal and properly prepared. Get legal advice regarding incorporating, FLP’s, LLC’s, retirement plans and Trusts.
If you are in business today, you need to be a corporation. Regular corporations, Sub S Corporations, or Limited Liability Corporations are the three choices. Corporations provide protection by separating your personal assets from business activities. If you business is sued, your personal assets cannot be used to satisfy a debt or lien. Since you have great liability in running a business, protect your personal assets. Today many persons are forming Nevada corporations, in addition to their in-state corporations, because of the total privacy for shareholders, the ability to form a corporation with only one member, no state income or franchise tax, and no formal information sharing with the IRS. You only pay about $75-150 per year to operate as a Nevada corporation, even though your business is out of state.
FLP’s are abbreviations for Family Limited Partnerships. It is actually like a business partnership between two individuals, with one being the general partner and the other the limited partner. The limited partner is the key ,as the limited partner is not liable for the partnership debts. For example, the general partner could be the Nevada corporation and the FLP could own stock in the corporation.
LLC’s, Limited Liability Corporations, are like S corporations, but the income is not directly distributed to stockholders according to the percentage of stock they own. LLC’s can determine the distribution of profits as it is not automatic. LLC’s could be set up to hold any rental income properties to shield them from lawsuits.
Retirement plans such as pension trusts can be set up under the Nevada corporation for the owners and your home state corporation for the employees. You are wanting to protect the retirement plans and shield them from the corporate lawsuits.
Many Trusts exist today including charitable remainder trusts, irrevocable life insurance trusts, etc. Living trusts might be funded by your personal home, in-state corporate stock, Nevada corporate stock, pension trusts, etc. The key is ownership of assets by the trusts and not by you personally.
These planning tools are not for everyone, but be mindful of protecting your assets from probate or lawsuits. Do you have a long term plan for protecting your assets and a plan for moving them to your heirs upon your death? Probate, litigation, and taxes can all be minimized if you set up your personal and business assets correctly and legally. Once again, discuss all these options with your attorney.
A couple of good books to get you on your way is: Multiple Streams of Income by Robert Allen and Die Broke by Stephen Pollan. Good luck.