Asset Protection - PDF

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					                                   ASSET
                               PROTECTION
Created by Brian.Christensen
                                             Why use entities?
                           Liability Protection

 In typical lawsuit scenario, before the attorney takes potential case he or
In aa typical lawsuitscenario, before the attorney takes aa potential case he or
she will perform an asset search on the party they are looking to sue.
 she will perform an asset search on the party they are looking to sue.

 The more assets person has in his or her name the more attractive he or
The more assets aa person has in hisor her name the more attractive he or
 she becomes. The practice of law is business and the attorney wants to be
she becomes. The practice of law is aa business and the attorney wants to be
sure that there are enough assets to recover and attach to the case before
 sure that there are enough assets to recover and attach to the case before
undertaking several years of costly litigation.
 undertaking several years of costly litigation.




                             Tax Advantages

One can have the tax benefits of being taxed after expenses at aacorporate
 One can have the tax benefits of being taxed after expenses at corporate
rate rather than before expenses and at the higher rate of an individual.
 rate rather than before expenses and at the higher rate of an individual.
                                          What's a Corporate Veil
One of the primary advantages of forming an entity for your business is that the business owners
 One of the primary advantages of forming an entity for your business is that the business owners
are not held personally liable for the debts or liabilities of the company...
 are not held personally liable for the debts or liabilities of the company...
Corporate Veil - A line of protection, which separates the company's liabilities from the business owner's
 Corporate Veil - A line of protection, which separates the company's liabilities from the business owner's
personal assets.
 personal assets.
Under some circumstances, if the owner does not follow the proper procedures, a creditor can pierce the
 Under some circumstances, if the owner does not follow the proper procedures, a creditor can pierce the
"Corporate Veil" and reach the personal assets of the business owner.
 "Corporate Veil" and reach the personal assets of the business owner.


1. ALTER EGO - The most common way that the Corporate Veil is pierced is when the business owner is
 1. ALTER EGO - The most common way that the Corporate Veil is pierced is when the business owner is
considered the "alter ego" of the company. This typically occurs where the company ignores the corporate
 considered the "alter ego" of the company. This typically occurs where the company ignores the corporate
formalities such that it is not recognized and treated as a separate entity by its owner.
 formalities such that it is not recognized and treated as a separate entity by its owner.
2. FRAUD - The second most common way in which the Corporate Veil is pierced occurs when a business
 2. FRAUD - The second most common way in which the Corporate Veil is pierced occurs when a business
owner commits fraud.
 owner commits fraud.
3. GROSS NEGLIGENCE - Another common way in which the Corporate Veil can be pierced occurs when
 3. GROSS NEGLIGENCE - Another common way in which the Corporate Veil can be pierced occurs when
the business commits acts which are grossly negligent or reckless. Gross negligence occurs when the
 the business commits acts which are grossly negligent or reckless. Gross negligence occurs when the
business intentionally fails to perform duties or commits reckless acts. If a plaintiff can show that the
 business intentionally fails to perform duties or commits reckless acts. If a plaintiff can show that the
business committed reckless or crossly negligent acts then a court may allow a plaintiff or creditor to
 business committed reckless or crossly negligent acts then a court may allow a plaintiff or creditor to
pierce the corporate veil.
 pierce the corporate veil.
            Steps to Protect the Corporate Veil

1. Maintain an active status for your business entity with the states you are authorized to do business in.
 1. Maintain an active status for your business entity with the states you are authorized to do business in.
This usually requires a simple filing and payment of an annual fee to the State. Failing to stay current with
 This usually requires a simple filing and payment of an annual fee to the State. Failing to stay current with
the State will cause your entity to become in-active or delinquent and the state will assess you additional
 the State will cause your entity to become in-active or delinquent and the state will assess you additional
penalty fees for not meeting your annual deadlines. Moreover, if the entity is dissolved by the state, your
 penalty fees for not meeting your annual deadlines. Moreover, if the entity is dissolved by the state, your
protection ends on that date.
 protection ends on that date.
2. Own your business assets (e.g. real estate) in the name of the entity and execute all contracts and legal
 2. Own your business assets (e.g. real estate) in the name of the entity and execute all contracts and legal
documents in the name of the entity. This may require new deeds or updates to contracts.
 documents in the name of the entity. This may require new deeds or updates to contracts.
3. Hold annual meetings and complete annual minutes. This is required a requirement for Corporations
 3. Hold annual meetings and complete annual minutes. This is required a requirement for Corporations
and while it is not required of Limited Liability Companies ("LLC") or Limited Partnerships ("LP"), most
 and while it is not required of Limited Liability Companies ("LLC") or Limited Partnerships ("LP"), most
practitioners still recommend that you follow through on these formalities.
 practitioners still recommend that you follow through on these formalities.
4. Create letterhead and business cards for each business operation and use them. You want it to be clear
 4. Create letterhead and business cards for each business operation and use them. You want it to be clear
that you are acting on behalf of your company and not in an individual capacity.
 that you are acting on behalf of your company and not in an individual capacity.
5. Maintain a separate checking account for each company and don't co-mingle business assets with
 5. Maintain a separate checking account for each company and don't co-mingle business assets with
personal assets. Using your personal account for business activities shows complete disregard for the
 personal assets. Using your personal account for business activities shows complete disregard for the
Corporate Veil since you are not treating the company as a separate entity from the business owner.
 Corporate Veil since you are not treating the company as a separate entity from the business owner.
6. Receive business income in the name of the business and pay for business expenses out of the
 6. Receive business income in the name of the business and pay for business expenses out of the
business bank account(s).
 business bank account(s).
                                    Types of Entities
Most Common Types of Entities:
 Most Common Types of Entities:
●Sole Proprietorship
 ●Sole Proprietorship
●General Partnership
 ●General Partnership
●Limited Partnership
 ●Limited Partnership
●Limited Liability Company (LLC)
 ●Limited Liability Company (LLC)
●S-Corp
 ●S-Corp
●C-Corp
 ●C-Corp
●Living Trust
 ●Living Trust
●Land Trust
 ●Land Trust
                                            When to use them...
LAND TRUST
 LAND TRUST
A land trust is aaform of an irrevocable living trust used to take title to real estate so
 A land trust is form of an irrevocable living trust used to take title to real estate so
the beneficiaries cannot be easily discovered. However the land trust is not
 the beneficiaries cannot be easily discovered. However the land trust is not
considered to be aaseparate taxable entity and there are no tax benefits of
 considered to be separate taxable entity and there are no tax benefits of
transferring property in or out of it.
 transferring property in or out of it.
CORPORATION
 CORPORATION
A corporation is an effective device to buy and sell real estate so ififthe beneficiary of
 A corporation is an effective device to buy and sell real estate so the beneficiary of
the land trust is aacorporation one can have the tax benefits of being taxed after
 the land trust is corporation one can have the tax benefits of being taxed after
expenses at aacorporate rate rather than before expenses and at the higher rate of
 expenses at corporate rate rather than before expenses and at the higher rate of
an individual.
 an individual.
LIMITED LIABILITY COMPANY
 LIMITED LIABILITY COMPANY
A LLC allows the shareholders to participate in the running of the company without
 A LLC allows the shareholders to participate in the running of the company without
sharing its liability. Like aaS-Corp, the profits and losses flow to the owners. LLC's
 sharing its liability. Like S-Corp, the profits and losses flow to the owners. LLC's
can be quite useful to use with rental property. One can form an LLC for every
 can be quite useful to use with rental property. One can form an LLC for every
property and file one personal income tax ififthere is only one owner.
 property and file one personal income tax there is only one owner.
                                                                    Sole Proprietorship
Ownership
 Ownership
One owner
 One owner
Personal Liability of Owners
 Personal Liability of Owners
Unlimited personal liability for the obligations of the business
 Unlimited personal liability for the obligations of the business
Tax Treatment
 Tax not taxed,
Entity Treatment as the profits and losses are passed through to the sole proprietor
 Entity not taxed, as the profits and losses are passed through to the sole proprietor
Key Documents For Formation
 Key Documents For Formation
DBA filing
 DBA filing
Management of the Business
 Management of the Business
Sole proprietor manages the business
 Sole proprietor manages the business
Capital Contributions
  Capital provides capital.
Individual Contributions
  Individual provides capital.
                                                               General Partnerships
Ownership
 Ownership
Unlimited number of general partners allowed
 Unlimited number of general partners allowed
Personal Liability of Owners
 Personal Liability of Owners
Unlimited personal liability of the general partners for the obligations of the business
 Unlimited personal liability of the general partners for the obligations of the business
Tax Treatment
 Tax not taxed as
Entity Treatment the profits and losses are passed through to the general partners
 Entity not taxed as the profits and losses are passed through to the general partners
Key Documents For Formation
 Key Documents For Formation
General Partnership Agreement
 General Partnership Agreement
Local filings if partnership holds real estate
 Local filings if partnership holds real estate
Management of the Business
 Management of the Business
The general partners have equal management rights, unless they agree otherwise
 The general partners have equal management rights, unless they agree otherwise
Capital Contributions
 Capital Contributions
The general partners typically contribute money or services to the partnership, and receive an interest in profits and losses
 The general partners typically contribute money or services to the partnership, and receive an interest in profits and losses
                                                               Limited Partnerships
Ownership
 Ownership
Unlimited number of general and limited partners allowed
 Unlimited number of general and limited partners allowed
Personal Liability of Owners
  Personal Liability of Owners
Unlimited personal liability of the general partners for the obligations of the business; limited partners generally have no personal
  Unlimited personal liability of the general partners for the obligations of the business; limited partners generally have no personal
liability
  liability
Tax Treatment
 Tax not taxed,
Entity Treatment as the profits and losses are passed through to the general and limited partners
 Entity not taxed, as the profits and losses are passed through to the general and limited partners
Key Documents For Formation
 Key Documents Certificate
Limited PartnershipFor Formation
 Limited Partnership Certificate
Limited Partnership Agreement
 Limited Partnership Agreement
Management of the Business
 Management of the Business
The general partner manages the business, subject to any limitations of the Limited Partnership Agreement
 The general partner manages the business, subject to any limitations of the Limited Partnership Agreement
Capital Contributions
 Capital Contributions
The general and limited partners typically contribute money or services to the limited partnership, and receive an interest in profits
 The general and limited partners typically contribute money or services to the limited partnership, and receive an interest in profits
and losses
 and losses
                                         Limited Liability Company
Ownership
 Ownership
Unlimited number of “members” allowed
 Unlimited number of “members” allowed
Personal Liability of Owners
 Personal Liability of Owners
Generally no personal liability of the members for obligations of the business
 Generally no personal liability of the members for obligations of the business
Tax Treatment
 Tax not taxed (unless chosen to be taxed), as the profits and losses are passed through to the members
Entity Treatment
 Entity not taxed (unless chosen to be taxed), as the profits and losses are passed through to the members
Key Documents For Formation
 Key Documents For
Articles of OrganizationFormation
 Articles Agreement
Operatingof Organization
 Operating Agreement
Management of the Business
 Management of the Business
The Operating Agreement sets forth how the business is to be managed -- a Manager can be designated to manage the business
 The Operating Agreement sets forth how the business is to be managed -- a Manager can be designated to manage the business
Capital Contributions
 Capital Contributions
The members typically contribute money or services to the LLC, and receive an interest in profits and losses
 The members typically contribute money or services to the LLC, and receive an interest in profits and losses
                                                                                C-Corporations
Ownership
 Ownership
Unlimited number of shareholders allowed; no limit on stock classes
 Unlimited number of shareholders allowed; no limit on stock classes

Personal Liability of Owners
 Personal Liability of Owners
Generally no personal liability of the shareholders for the obligations of the corporation
 Generally no personal liability of the shareholders for the obligations of the corporation

Tax Treatment
  Tax Treatment
Corporation taxed on its earnings at the corporate level and the shareholders have a further tax on any dividends distributed
  Corporation taxed
(“double taxation”) on its earnings at the corporate level and the shareholders have a further tax on any dividends distributed
  (“double taxation”)

Key Documents For Formation
 Key Documents For
Articles of IncorporationFormation
 Articles
Bylaws of Incorporation
 Bylaws
Organizational Board Resolutions
 Organizational Board
Articles of IncorporationResolutions
 Articles of Incorporation
Stock Certificates
 Stock Certificates
Stock Ledger
 Stock Ledger

Management of the Business
 Management of has overall management responsibility and officers have day-to-day responsibility
Board of Directors the Business
 Board of Directors has overall management responsibility and officers have day-to-day responsibility

Capital Contributions
 Capital stock are sold
Shares ofContributions to raise capital, either sold as common or preferred stock (Securities laws apply)
 Shares of stock are sold to raise capital, either sold as common or preferred stock (Securities laws apply)
                                                                                 S-Corporations
Ownership
 Ownership
Up to 75 shareholders allowed; only one basic class of stock allowed
 Up to 75 shareholders allowed; only one basic class of stock allowed
Personal Liability of Owners
 Personal Liability of Owners
Generally no personal liability of the shareholders for the obligations of the corporation
 Generally no personal liability of the shareholders for the obligations of the corporation
Tax Treatment
 Tax generally not
Entity Treatment taxed as the profits and losses are passed through to the shareholders (“pass-through” taxation)
 Entity generally not taxed as the profits and losses are passed through to the shareholders (“pass-through” taxation)
Key Documents For Formation
  Key Documents For
Articles of IncorporationFormation
  Articles
Bylaws of Incorporation
  Bylaws
Organizati
				
DOCUMENT INFO
Description: A complete breakdown of all types of business entities, how to set them up, and when it's appropriate to use them.
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PARTNER Brian Christensen