10 Biggest Myths About Protecting Assets with Your Business
- March 17, 2015
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You’ve done it.
You’ve poured your blood, sweat, and heart into your own company and made it truly successful. You took the steps to starting a company and built it with your own hands and it is now worth $500,000 or maybe even $10M. Unfortunately, as our estate planning blog reviews, there are some issues to think about now that you have made it, because you won’t always be here to drive your business. But most of all there are many protecting assets myths that people tell us that someone told them one thing or another and it is not always true in the real-world. Take the time to protect your assets now so they will be around long after you’ve retired.
1. My Company is a Separate Entity so I’m Protecting Assets
This is only true if you established it as a truly separate entity and treated it as such for any and every transaction. As a sole proprietor or partner, you and your family are on the hook if the business gets sued or a bank calls in a personal guarantee. In the event of a lawsuit, attorneys become sharks and smell money from miles away. They will examine your business income, and that of your family, under a microscope to be sure they can squeeze every last penny out of all of you. Once a lawsuit is settled, they cannot go back and sue another party with funds because they missed one.
2. My Company is an LLC, C Corporation, or S Corp, so I’m Protecting Assets
Congratulations, you’ve taken the steps to starting a business, avoiding a proprietorship and separated your personal and professional life with an LLC, C Corporation, or S Corp because you are smart enough that you don’t need to ask “what does llc stand for?” – at least financially. Unfortunately, there’s this financial loophole called “piercing the corporate veil.” In layman’s terms, it means that if your personal and business assets are not completely separate then creditors can come after your personal assets because while the assets inside the company is separate, the shares of stock are a personal asset and if one controls the shares, then they control the assets in the company; in other words, the LLC could be just window dressing. Be sure your accountant keeps everything completely separate. There should never be a personal asset on your business account and vice versa. It’s easy to whip out that corporate card when you don’t have cash to pay for a gallon of milk or the burgers at the drive through. Whatever you do, DON’T! Nearly 98% of all small business owners do this and it only takes a single transaction like this to become their demise in a lawsuit.
3. My Estate Plan and Business Plan are Two Different Things
This is not the best idea. Ideally, you don’t want your business to fail when you retire or die. You’ll have a succession plan. Use your estate plan to ensure the business and personal assets stay separate.
4. My Business Partner and I Are Not Responsible for Each Other and This Will Protect Your Assets
While that sounds logical, it isn’t. If your partner gets sued, you may end up with a partner that you don’t want. Even if the partnership is set up as an LLC, you have some protection under “changing orders,” that limit the assets available for the taking to what the partner would be eligible to take in the event you both sold the business. Smart attorneys know all the ways to get around this and can get your partner to sell their part of the business to pay their creditor.
5. My Kids Don’t Want my Business, So It Will be Sold
While your kids may be so clueless about your business, or just business in general, that they need to ask “what does LLC stand for?,” it does not mean that they may not become interested if they saw an opportunity. With the right planning, your business will go on and be passed on to whomever you choose, whether that’s your children or a trusted manager or your niece’s husband’s cousin’s brother. The beneficiaries of your estate don’t have to know what your succession plan is. If you set up your succession plan correctly, your wishes for continuing your business will be fulfilled.
6. How to Protect Your Assets – The Irrevocable Family Trust Fund
If you haven’t already, separate your personal and company assets. Despite your best intentions, many new businesses don’t make it 5 years. A failed company can really decimate your personal finances, especially when any loans you made required personal guarantees. By creating an LLC owned by a Family Trust and a separate trust fund that owns your home and personal assets, creditors and hungry attorneys will be limited what they will be able to take and won’t be able to put a lien on not your personal finances in your family trust fund when using an irrevocable trust, and thus you will be protecting assets.
If you have a partner, both of you should place your shares of the LLC in an Irrevocable Family Trust Fund and draw income from the company, just as an employee would, or if set up right, through member distributions to protect your assets. If you or your partner is sued, there’s nothing the creditor can easily grab, other than perhaps a wage garnishment, which frankly, can be adjusted. The remaining partner’s personal assets are free from the sticky fingers of creditors because they are completed segregated in the Irrevocable Family Trust Fund.
The best way to keep your business going after you’ve gone is to establish a trust fund through an Irrevocable Family Trust Fund. A Trustee can help the family make sure the company is well managed and the family receives benefits from the family trust fund. Since this the family trust fund is separate, the family’s assets are safe.
7. Protecting Assets When You’re Being Sued
There are few things that send people into a panic more than seeing a process server, sheriff or marshal on their doorstep with a court summons. How in the world can you be sued? What could I/we have done to warrant this? Panic quickly turns to terror if and when you realize that your assets are free game to the other party because they’re not protected and now it might be too late to move anything around.
Most successful people actually have to go through this hair-raising experience because they focus so intensely on making the money that they forget about protecting assets and they don’t think about it until it happens to them. If you are unlucky enough to be on the wrong end a lawsuit, this edition of our estate planning blog provides valuable information on what to do after you realize what’s happening.
Take It Seriously
The first rule our estate planning blog reviews is ignoring a lawsuit will not make it go away. It doesn’t matter how trivial the matter seems to you. It’s a big deal to the other party; so big that they are taking the time to actually sue you. Failing to answer the complaint in a lawsuit can result in the court deciding that because you’ve chosen not to take action, you are at fault and will award the plaintiff a default judgement. When a default judgement occurs, that the plaintiff can go to your bank and freeze every asset you have as well as put lien on any property you own. Unfortunately, you won’t find out until checks start bouncing and you find that your account balance is $0.00.
Limited Time Offer
The defendant in a lawsuit has a limited amount of time to respond to the complaint or make a motion. In some states, defendants may have less than 20 days to respond. Put your rage aside and call your lawyer immediately.
8. You Don’t Need a Lawyer
You are not Johnny Cochran or Robert Shapiro, so get a lawyer. Just because your brother-in-law’s cousin is a paralegal and can help you with the paperwork, doesn’t mean that you can do this on your own. In fact, some states require an attorney appear in court on behalf of a company or C corporation that is named in a lawsuit. Remember, you get what you pay for. If you decide you don’t want to pay attorney fees, you might not have any money left to pay anyone else. Bite the bullet and let the attorney do their job.
Choose the Right Attorney for the Job
If you need heart surgery, our estate planning blog suggests that you don’t go to see a podiatrist. Likewise, if you are facing a lawsuit, choose a lawyer who specializes in this type of lawsuit. It’s perfectly fine to ask how many cases he/she has taken to verdict and how many they’ve settled. You need an attorney who’s a skilled negotiator and an experienced trial lawyer.
Tell your Lawyer Everything
Your attorney is your advocate, but they are only as good as the information you give them. Never, ever lie or withhold information from your attorney. Not only does withholding information make you look bad, it puts your attorney at a disadvantage especially if the information withheld is used by the plaintiff’s attorney. Any good attorney that is going after you is going to dig up everything possible to beat you, so the last thing you want to your attorney to not be prepared for all possibilities surrounding you or your company.
Check your Insurance Policy
Most people are aware of the provisions in auto and homeowner’s policies that provide benefits in the event you’re sued over an auto accident or accident on your property. Errors and omissions policies or malpractice insurance often offers coverage in the event of a lawsuit. Once papers are served, call your carrier. In most cases, the insurance company will take charge of the situation, provide a lawyer and negotiate the settlement.
Listen to your Lawyer – He Can Help Protect Your Assets
In order to benefit from your attorney’s expertise, you have to actually listen to what they say, even if you don’t like it. This is what they do for a living, not you. Failing to listen will probably get you in deeper.
It’s Not the Principle of the Thing
No matter which side you’re on, you need to know why you’re in court. Does defending yourself make sense from a cost/benefit analysis? If you are spending thousands on legal fees, but the amount in question is only a few hundred dollars, you may want to rethink your strategy and negotiate a settlement – this is yet another method to protecting assets in your nest egg. Proving your innocence may be good for your ego and reputation, but does it make sense for your bottom line? What kind of toll will it take on both you and your company as the case slogs through the court system for a few years?
Don’t Expect Reimbursement
Unless it’s specifically spelled out in the agreement, you are responsible for your own court costs. Even if the agreement specifies that legal fees are to be paid, it’s rare that the court requires ALL fees to be paid.
9. Lawsuits are Long-Term Events
Unlike TV, lawsuits are rarely a quick event. Motions, discovery, counter claims can take months or years, all while you are trying to maintain your company and family life. Generally, lawsuits run on a cycle. There are times of a flurry of activity followed by a lull in the action. The best way to get through a lawsuit is to trust your lawyer and be patient.
10. One Last Myth and Tip Protecting Assets
If you’re being sued, our estate planning blog suggests to take the time to evaluate your options in protecting assets. Many attorneys advise their clients that they can’t take action to protect your assets once you suspect you may be the object of a lawsuit. Be sure your attorney understands what fraudulent conveyance is and how to manage the statute of limitations on asset transfers. There are loopholes that can make a fraudulent conveyance claim very difficult to enforce. Take every opportunity to make it difficult to be sued, even if you suspect it’s imminent, and it can put you in a better position to negotiate and ultimately protect your assets.
If you need help strategizing a plan specific to you and your family’s needs, email us at firstname.lastname@example.org or call (888) 538-5872 for a free 30 minute consultation.
TELL US what you think in the Comments Box below. What is the craziest lawsuit you have heard or experienced? Why?