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Articles Asset Protection for Gold, Silver and Precious Metals Gold, silver and other precious metals require asset protection. We live in a litigious and uncertain world, which is most likely one of the reasons you invested in precious metals in the first place. It is important to know that if gold, silver, platinum and other metals are held in your individual name, they too can be lost in a lawsuit. By using an LLC to hold title to your precious metals you have much greater protection. With precious metal assets in an LLC, if you are sued individually a judgment creditor (the person who won the lawsuit) has to fight through the LLC to get at the assets. This is a difficult process. By using a Wyoming LLC, all the judgment creditor can get (after hiring a Wyoming attorney to go to court in Wyoming) is a charging order. The charging order is a court order directing the judgment creditor to receive any distributions made from the LLC. This means they can't force you to sell the metals and give the money to them. All it allows is for monies - when distributed - to go to the judgment creditor. In the case of precious metals what distributions will be made? You typically would not be distributing your gold, silver or platinum. Instead, you are holding them in the LLC for protection. You are free to hold them in the LLC until the judgment creditor goes away or settles for pennies on the dollar. More importantly, by holding valuable precious metals in an LLC the claim may never be brought in the first place. LLCs offer gold asset protection, silver asset protection and precious metals asset protection. _____________________________________________ “The Short Sighted End of Offshore Banking” Compliance costs for handling U.S. accounts are already so high that many banks are simply refusing to open new accounts for U.S. individuals. If HR 4213, which passed the House of Representatives in December 2009, is approved by the Senate in the coming weeks even more banks will terminate their U.S. clients. The bill, the Foreign Account Tax Compliance Reporting Act (or FATCAT), will essentially close the door to many foreign banks. There’s more… Coming to a tax haven near you: The IRS Criminal Investigation Division is opening offices in a dozen foreign countries. The disgruntled banker in Switzerland or Panama who wants to provide offshore banking information to the IRS can now just walk into their local IRS office. The informant commission incentives are there – but they are to be questioned. UBS banker Bradley Birkenfeld turned IRS informant and brought his Swiss bank to the brink with the IRS and U.S. Department of Justice. The case, which was recently featured on 60 Minutes, was egregious. UBS bankers were flying to America to recruit and assist U.S. citizens in evading their U.S. tax obligations. Did Birkenfeld get millions for his whistleblowing activities? No, the Department of Justice found fault in a related matter. So not only is Birkenfeld out his bounty but he is serving a 40-month prison sentence. No one else in the entire UBS scandal is serving one day of time. Just the informant. One wonders how many potential whistleblowers will actually show up at these new IRS offices. Still, the IRS is expanding its reach. It has joined the Joint International Tax Shelter Information Centre. The U.S., Australia, Japan, Canada and Britain are coming together to conduct simultaneous tax audits of wealthy individuals. So not only will an audit mean your U.S. activities are questioned, but those activities in all the aforementioned countries may also be scrutinized. Now Americans will get to see how IRS audit agents stack up against their British and Japanese counterparts. Is all of this a good thing? We have been suspicious and even critical of offshore banking for years. But the one positive aspect of it all cannot be denied. These institutions place and manage a great deal of non-U.S. money into the U.S. stock market. They trade and hold U.S. dollars. But with compliance costs so high, and the challenge of greater regulations on the horizon, these banks are now and will be pulling their money out of the U.S. At a time when we need as much liquidity as possible, beating up on offshore banks may prove costly to America in the long run. _____________________________________________ New Tax Law Benefits Limited Liability Companies Not all entities and their owners are created equal. Corporations and shareholders, LLCs and members, Limited Partnerships and limited partners are all treated differently in certain circumstances under the tax code. Beware of the IRA Prohibited Transaction Scam Have you ever been told you can make incredibly beneficial investments using your self directed IRA monies? Buyer beware. IRAs, as most people know, can offer significant tax deferrals, thus allowing for retirement accounts to grow over time. And although there is a great deal of confusion over the issue, IRAs can also offer asset protection in bankruptcy from creditors. But you can lose these two big IRA benefits if you engage in “prohibited transactions.” What is a prohibited transaction? It is an investment you make with your IRA that directly benefits you. To help understand why certain transactions aren’t allowed lets look at the public policy behind IRAs. Without admitting it, Congress knows that their reckless stewardship of the Social Security system has driven it towards an inexorable bankruptcy. So they provided the tax incentives for IRAs and other retirement accounts in order for Americans to have some sort of nest egg for the golden years. Ironically, after borrowing from the Social Security system for their own budget excesses, Congress laid down the law that individuals could not act in such a profligate manner. Do as I say, not as I do. So prohibited transactions are those where an individual’s retirement account benefits the individual instead of staying in safer, unrelated investments that will one day hopefully improve the individual’s future nest egg. In a recent Florida bankruptcy case, the owner of a self directed IRA borrowed money from the account to pay off a mortgage on a property he wanted to acquire. He then personally acquired the property and sold it. This self-dealing (using the IRA to benefit him in a separate real estate deal) was deemed a prohibited transaction. As such, his IRA asset protection was lost and the creditors were able to reach and take all of his retirement account. Not only was his asset protection lost in bankruptcy but due to the self dealing the entire IRA account became taxable to him. The loss of tax deferral and asset protection was brought about by one simple transaction. What do you need to know here? That there are literally hundreds of fly by night as well as seemingly legitimate firms encouraging people to engage in prohibited transactions. You need to be wary of the firm which paints a wonderful picture of all the financially savvy moves you can make with a self directed IRA. They will charge you thousands of dollars for their package of services and leave your IRA utterly exposed to both creditors and ungodly IRS tax levies. So when a promoter tells you that your self directed IRA can be used to start your own business you’ll know that the answer is no. The use of IRA funds for that purpose is a prohibited transaction. When the slick operator tells you that IRA monies can be used to buy a portion of a family vacation home you’ll know to hang up the phone. It just doesn’t work that way. And know that these promoters are persistent. They can taste the $5,000 they want you to shell out for their plan that will treble your taxes and lose your asset protection. To that end they will provide you with an IRS opinion letter justifying their position. I have read such letters – and they offer nothing of the sort. What they do offer is another way for these promoters to lure in unsuspecting clients. The IRS is just catching up with the IRA/prohibited transaction scam. Do not allow yourself to become a part of the oncoming wreckage. __________________________________________________ Good Standing - Are You in Good Standing? Good standing sounds important. It conveys the sense of ethical and upright activities. It is a place from which you want (or should want) to operate. When it comes to corporations, LLCs and LPs good standing is a legal requirement. And the consequences of not being in good standing, while unfortunately unappreciated by most, can be devastating. Almost every state requires each corporation, LLC and LP formed there or qualified to do business there to file an annual report. The purpose of these periodic filings is two-fold. First, it allows the state to collect their annual fee from the entity for the upcoming year. And make no mistake, these filing fees add up and are a very important and stable source of state revenue. Second, the reports confirm whether the entity is still active in the state. The entity that fails to file its annual report (and also does not pay its fees to the state) can lose its good standing status. What does this mean? A case helps explain the consequences. Matt and Scott owned an auto repair shop. They were both busy and although they had formed a corporation for limited liability purposes they had failed to attend to the follow up paperwork. While the corporation had been formed in 2008, they had not filed any later reports or paid the fees for 2009 and on. As such, they were not in good standing. Two events drove home the importance of maintaining a good standing. Matt had signed a very favorable contract with a supplier on behalf of the corporation in the winter of 2009. The supplier soon realized they could not make any money on the contract and asked their attorney to look into how to get out of the deal. Their attorney first went to the Secretary of State’s website to see if the corporation was in good standing and thus had the capacity to enter into the contract. It was very easy for the supplier to void the contract. The corporation, by not being in good standing, was legally unable to sign the contract. State law was very clear on the matter. If you were not current you couldn’t act as a corporation. As well, in many states you cannot bring or defend a lawsuit if you’re not current. Matt had no leverage against the supplier and lost the contract. An even more serious consequence arose over a job Matt had performed. A brake job went horribly wrong resulting in significant injuries and damages. The attorney retained to bring an action for recovery against the corporation was quite pleased to learn the entity was not in good standing when the brakes were repaired. When Scott learned of this he immediately attempted to bring the company current to avoid the personal liability. But it was too late. He had done the work when the corporation was not in good standing. The die was cast. This meant that Scott could be sued personally for the damages. By acting for a corporation not in good standing Scott was not protected by the entity and thus personally liable. Scott and Matt learned the hard way the importance of keeping your corporation, LLC or LP current and in good standing. It is very easy to see if someone’s entity is in good standing or not. Competitors, attorneys and even the curious can check the state’s online database for this information. Don’t be the next victim of an innocent or unintentional failure to follow this important corporate formality. Make sure you are in good standing at all times so that the limited liability entity you set up continues to protect you in all your activities.
Kids and Asset Protection - Review Your Structures When Your Child Gets A Drivers License Your risk exposure goes through the roof when your child under 18 years old obtains a drivers license. Are you surprised? Didn’t you read the fine print? In most states, the application for an instruction permit or drivers license must be signed by a parent or custodian of the child. And by signing that simple form you agree to be responsible for the negligence or misconduct of the minor while they are driving. So if your 16 year old son, god forbid, gets in a horrific car accident not only is he responsible for the resultant damages but equally so are you. Are you thinking about protecting your assets yet? These laws can ensnare all sorts of innocent parties. For example, in Nevada, if neither parent has custody and there is no custodian, an employer may sign the drivers license application form. (N.R.S. 483.300) Of course, having a young employee who can drive may be a benefit to an employer. But what the employer may not realize is that he or she has just become personally responsible for any accident, and the resulting direct and consequential damages, the young driver may cause. In addition to driving there are other areas where an unruly child can get a parent into trouble. In Arizona, for example, parents and custodians are responsible for their minor’s bad behavior:
While the law limits the parent’s responsibility to $10,000, that amount is for each wrong, which can quickly add up. As well, the law allows insurance companies “to exclude coverage for the acts of a minor imputed to his parent or legal guardian.” (A.R.S. §12-661 C). This means the parent will have to personally pay the $10,000 per infraction. In California the parent’s amount is $25,000 for each tort of the minor, which an insurance company does not have to pay. (Cal. Civ. Code §1714.1) In a sign of the times, the California law specifically holds parents responsible for a minor’s graffiti defacings. What does all this risk mean for parents? That asset protection is crucial for those whose children are coming of age. Be sure to work with your asset protection advisor to make sure all assets are protected. (If you need such an advisor feel free to call us at 1-800-700-1430.) Consider holding your brokerage account in a Wyoming or Nevada LLC. Otherwise, if that valuable account is in your name as an individual it will be the first place a judgment creditor will look to satisfy their claim. So before you sign that form making you personally responsible for your minor child’s driving activities, double check and make sure your assets are protected. Your personal residence, your brokerage account and all of you other valuable assets must be protected before your children start driving, and increasing your risk profile. Garrett Sutton, Esq. is a corporate attorney and is the author of "Own Your Own Corporation" and other titles in the Rich Dad Advisor series. His firm forms and maintains corporations, LLCs and other entities. To get a FREE copy of Garrett's book, "What to Know Before you Incorporate" go to our homepage: http://www.corporatedirect.com/index.html
The Panama Seminar: by Garrett Sutton The scene is a lush, tastefully appointed resort right on the bay. Beautiful sand beaches lead to calm, blue green waters. On a patio overlooking the spectacular view a party is going on. It is the welcoming event for what is claimed will be a powerful, eye opening three day seminar. Cocktails in hand, attendees are getting to know people from all over the United States. They have all flown in to learn secrets that only the rich have access to, secrets that must be communicated confidentially outside of America. A new friend of mine, whom we’ll call Joe, is in attendance. He makes a decent amount of money and is upset with all of the taxes he pays. So Joe has paid $7,500 to hear what the experts have to say. As the ice breaks, the sun sets and the liquor does its job, the party starts to click. People are having fun, voices get louder and connections are made. Joe does not drink and is a sober observer to the frivolity. He notices people taking photos of each other with digital cameras. One man in particular is getting groups of people together and taking photos. The man’s wife (or girlfriend or friend?) is a very attractive blond in her mid 30’s wearing a mildly revealing outfit. She is easily able to chat up the predominately male group of attendees. Joe gets a closer look at parts the others aren’t focusing on. She is wired for sound. Her male friend brings another group over for photos and shared fun. Joe notices the man’s shoes. They are black, heavy lace ups, almost government issue. Joe wonders who the couple works for. Are they with the seminar group, a kidnapping ring, or the U.S. government? Whoever they are with, they are good at what they do. The next morning the seminar begins. Larry, the tanned and well dressed promoter, gets up and gives a stirring speech. The man is seemingly very knowledgeable and is backed up by impressive testimonials and incredible color brochures. In his remarks he says people have made the right choice and that their lives will be positively changed by the information they are about to receive. He notes with great pride that he and his team are not lawyers, because lawyers don’t know/can’t appreciate/won’t give the advice this lucky group will be fortunate enough to take in over the next three days. During the seminar Joe learns about offshore corporations and asset protection and offshore investing. He has made the very conscious decision not to buy anything or agree to any services while in Panama. As such, he was keenly able to observe both the overt and very subtle pressure being applied by the promoter and his attractive, well spoken minions to buy now. The special pricing was not available once the seminar was over. (Why not? Joe pondered.) Buying right now was the smartest and most important decision you could ever make. (More important than marrying the right person and bringing great kids into the world?) If you didn’t buy now you would regret it for the rest of your life. (I will? Joe wondered.) Joe became friends with a man named Scott from Spokane. They both liked fishing and white water rafting and thus hit it off. They differed in one big respect: Scott was primed to buy. Scott bought five of the offshore corporations and trusts they were promoting. The combination of the five entities was structured in such a way to provide maximum asset protection and tax savings. The structure cost $20,000 to set up, but Scott was assured he would save $50,000 a year in taxes for the rest of his life. Who wouldn’t spend that kind of money for the savings? Actually, Joe wouldn’t. Scott heard Nigel, a distinguished of British gentleman, present a seminar on managed offshore investment accounts where returns over 25% per year were guaranteed. Nigel cogently explained that the U.S. government deliberately limited the amount of money its citizens could make, and that the best returns were made by smart, independent thinkers investing offshore. Scott could not wait to turn over $250,000 to Nigel, his new investment advisor located in Panama. Joe actually could wait, and did. Joe and Scott met a third attendee at the seminar. Ron was from Cincinnati and made it a point to meet as many people as he could at the Panama Seminar. Ron just happened to be putting together a real estate deal in Belize. He needed asset protection advice, which is why he has spent $7,500 to attend the event (which was the best he’d ever seen). Ron and Scott had an involved conversation about Ron’s Belize project over lunch one day. Joe politely listened but did not rise to the bait, which was a 100% return in 18 months. Scott committed to an investment of $100,000, which Ron indicated had to be wired in the next 24 hours. The investment was almost full and Ron, Scott’s new friend, wanted to make sure he got in this incredible deal. The Panama Seminar ended with a going away party. Once again, the liquor flowed and did its job. Some attendees talked of how much they learned and benefitted and fanned the fires of value and positive word of mouth. Joe, always the critical thinker, asked himself whether these hugely satisfied customers, who always seemed to be the first to jump up and buy the next product in the seminar, were well placed shills. The attractive blonde was again dazzling to look at, and she held court with a large number of new friends she had made. They were eating out of her hand and talking freely. More photos were taken and more confidences revealed. Most attendees went to bed satisfied with the whole event and the money they spent. Joe returned home and decided against buying any offshore structures and investments. It just didn’t feel right. After a while the promoter’s pressuring sales minions stopped calling. But Joe did keep in touch with Scott. They spoke every month or so. At first, Scott was ecstatic with the results of the seminar. The offshore structures were in place and he was ready for tax saving. The managed offshore account was doing well. And Ron’s Belize project was funded and poised to provide a quick and significant return on investment. But after three months Scott’s tone began to change. He told Joe his accountant couldn’t condone or wouldn’t deal with the offshore structures. Initially, Scott gave his CPA the party line he learned at the Panama Seminar: USA professionals do not and will not ever understand the complexities of beneficial offshore structures. But over time and into the next year his CPA’s objections took hold and were strengthened by a surprise IRS audit. Scott casually mentioned that two other seminar attendees he kept in touch with were suddenly being audited, but did not initially connect the dots. Six months later Joe learned from Scott that Nigel, the offshore investment manager, had suddenly gone out of business. There was no forwarding number or address. Nigel was nowhere to be found. The country of Panama did not insure his investment account. Scott’s $250,000 had disappeared. Then Scott received the news that the Belize project had failed. The story was that Ron from Cincinnati had not made the last $50,000 payment to the developer. The $750,000 non refundable deposit, including Scott’s $100,000 investment, would not be returned and was lost. As Joe tried to console Scott he saw another side of his new friend. Just as Scott was quick to rise to the bait, he was dogged in fighting someone who took advantage of him. Scott was on a mission and started digging. He soon learned that Larry, the promoter, had left Las Vegas after being charged for fraud in an online Ponzi scheme. Like so many criminals before him, Larry was able to easily reemerge without training or scruples as an offshore asset protection expert. Scott learned from other investigators that there were very few barriers to entry to this scam. One could easily rent out a Panama hotel and lure attendees. Printing color brochures was not difficult. In fact, Scott learned a rule of thumb in the asset protection world: the more expensive the color brochures, the bigger the scam. Joe continued talking with Scott and was amazed by what he dug up. Nigel was a convicted felon from London who had drifted down to the Caribbean. Hooking up with Larry, they created a fake investment firm out of Nevis and Panama. Together, through seminars and other means, they had taken in over $12 million in investment monies by promising huge returns. When it was time to pull the plug they each disappeared with $6 million. Ron from Cincinnati was one of the many shills in the room at the Panama seminar. He was there to praise Larry’s knowledge and creativity. He was one of the first five people to jump up and buy each session. His enthusiasm was contagious and others followed him with credit cards in hand. Scott learned, not surprisingly, the Belize project was a scam. The developer, Ron and Larry split the $750,000 non refundable deposit between themselves. While Larry had disappeared, Ron and the developer were in Scott’s sights. Using very unorthodox and highly aggressive tactics not condoned by this U.S. Civil Courts, Scott was able to get his $100,000 back. Still, Scott was out $270,000 from his experience in Panama. As he and Joe continued to keep in touch, Scott always hailed Joe for his restraint amongst the purveyors of greed and fear at the Panama Seminar. Garrett Sutton, Esq. is the author of “Own Your Own Corporation” and other books in Robert Kioysaki’s Rich Dad’s Advisor series. Garrett and his firm provide affordable and professional asset protection.
Series LLCs: Where Angels Fear to Tread: by Garrett Sutton There's a lot of talk about Series LLCs. More and more people are wondering if they're a smart idea. The short answer is that they aren't - they haven't been tested, giving them limited applications if they have any at all. First, some background. LLCs alone are an excellent structure for many different uses. For instance, they work well as a method of holding high dollar assets like real estate. If you own commercial or rental property, it's important that you hold title to that property in an entity. If this entity (most likely an LLC) is run and managed properly, it can protect you from any personal liability. Many people own a number of different investment properties. They want to protect both their investments and themselves by placing them into one or more LLCs. The task then is scenario, every investment is held under a different LLC. That's not a popular answer for people who have lots of investments, but it's built on sound reasoning. Think of LLCs as giant shoeboxes. As many investment items as you like can be placed inside, but they're all at risk if something happens to the box. If a lawsuit happens, every investment you've placed into that LLC will be in danger. The solution is to separate your investments. Ideally, you should use a separate LLC for each one. If you can't, be sure to examine the equity you have at stake in every investment along with its liability potential. Then group them in LLCs accordingly. As an example, it's not a good idea to include a single family beach front rental in Maui in the same LLC as a duplex on the wrong side of town. You may have several thousand dollars of equity stored in the house on Maui, which is placed at risk by including it in the same LLC as the rough edged duplex. Keep them separate. However, if you own three single family homes in Idaho, each within about twenty thousand dollars of equity, you might feel that placing them together is an acceptable risk. But that segregation strategy can get expensive. If you have ten properties, using ten different LLCs might seem confusing and costly. Series LLCs seem to provide a solution as statutes in certain states allow you to create separate series within a single LLC, the debts and liabilities of which are only enforceable against that series. These laws allow LLCs to establish separate series of interests, members and managers, giving them separate duties, powers and rights. Those include the rights to profits and losses with respect to specific property and obligations. In states that have this kind of enabling legislation, each series within the LLC works as a separate entity under state law. This is why many people are attracted to series LLCs - they theoretically have the ability to shield property in different series from liabilities incurred in or against one another without paying state fees for multiple entities. This means that an LLC containing two properties can choose to place each into a separate series, so that liabilities from one can't cause problems with the assets of the other. (Remember the same effect can be created using two different LLCs to hold these two properties.) Many people prefer series LLCs because at first glance they appear to be cheaper to set up. However, this assumption is false. It's actually more complicated to set up a series LLC, making it more expensive than the basic type. In California you might find a series LLC appealing because the Franchise Tax Board charges an annual fee of eight hundred dollars for each entity. Many people think that setting up a single series LLC means paying only one fee in California. However, the Franchise Tax Board takes the position that each series counts as its own LLC for fee purposes, meaning you'll have to pay the same whether you set assets up in series or in their own separate LLCs. The biggest problem with series LLCs is that many states (including California) don't have series legislation and may choose to ignore the laws of the state where the series was created. That's because you're subject to their rules when doing business in their state. The example of the attitude of the California Franchise Tax Board applies to fees, but liability protection is also an issue. Since series LLCs are so new they've never been tested by courts, even in the states that permit them. That means there's no guarantee that limited liability protection will be extended to each series until every state rules on the subject. It's hard to see how a court would choose to grant this kind of protection inside one entity, and only time will tell if courts will do this. But do you want this type of uncertainty when you are trying to protect your assets? Again, one should be concerned about how series LLCs will be treated by the states that don't have laws permitting them. If you set up a series LLC in Nevada then register it as a foreign entity conducting business in the state of Massachusetts, each series in the LLC own a separate piece of property. If there's a lawsuit in regards to one of these properties you can't be sure that the Massachusetts court will honor the series structure of the LLC, applying Nevada's law to the real estate and activities that are located in Massachusetts. If they do, the claimant can collect only against the property in that series. If they don't, the claimant can collect against the properties in other series as well. States are expected to give full faith and credit to legislation of other states, but the answer is uncertain. Exceptions do happen. It is also important to note that the American Bar Association did a review of series LLCs and declined to endorse them. You can be certain that future court cases will take note of this development. Since the laws about creating series LLCs are different in every state that permits them, it might take a long time before enough case law is accumulated to give us any level of comfort about using them. If you want to make sure your assets have good, solid protection, it's a much better idea to avoid corporate structures that don't provide reliable protection. Avoid series LLCs as a form of protection until a definitive case law is established and rely instead on known, tested entities such as individual LLCs. Protect Yourself from Your Assets: by Garrett Sutton How can you best protect your personal assets? Here are some things to consider. • Keep Your Personal and Business Assets Separate If you don't insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business. As an example, if you're a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you. Or perhaps you've formed a two-man partnership with your friend. This may perhaps be an even worse idea than a sole proprietorship is. What this means is that you are as liable for your friend's errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner's signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag. To protect yourself, use a registered corporate entity, such as a C or S corporation, a limited liability corporation, or a limited partnership. You'll need to keep your company's registration up-to-date, hold annual meetings and keep annual minutes, keep business clients separate from your own, and avoid signing any business-related documentation in your name. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business. • Protect Your Business Assets You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business's assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though. A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for? The liability insurance should cover injuries to third parties on your property. It should cover trespassing, especially if you have undeveloped or vacant land. If you have people working on your property as your employees, you should also have Worker's Compensation insurance. The insurance should also have "increased cost of construction" additions if your building should become damaged or require reconstruction. That means you'll be covered at today's construction prices instead of those of previous years. If you are a landlord, "loss of rents" riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it's being rebuilt to offset right losses. A final consideration is a "higher limits" rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories. But as we know, insurance companies have an economic incentive not to cover every claim. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims. Keys for Using an S-Corporation: by Garrett Sutton If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once. While a corporation's profits are taxed once as the corporation's income and again when the profits are distributed as dividends, a limited liability company or limited partnership's profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation. Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business. While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders. Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following: • Incorporate the Business - As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities. • File an S-Corporation Election Form - To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy. • Notice and Obey S-Corporation Limitations - Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants' estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation. Every business is unique. Your business's form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations' tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business's options and choosing the best available business form, you will ensure that you take advantage of available opportunities. C Corporation Considerations by Garrett Sutton A C Corp has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corp can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits. This is not the case in a flow-through entity, such as an S Corp, LLC or LP. In each of those cases the entity may write off the costs of the benefits, but any employee/shareholder who owns more than 2% of the entity will pay taxes on the value of their benefits received. So, if having the maximum deductions and all of the employee fringe benefits on a tax-free basis is important to you, a C Corp may be your entity choice. C corporations are great for a business that sells products, has a storefront and employees, and may or may not have a warehouse where it keeps its inventory. C Corps don't work well with businesses that want to hold appreciating assets, such as real estate, because of the tax treatment on the sale of these assets. The most often-cited disadvantage of using a C Corp is the "double-taxation" issue. Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates. There are many things you can do to avoid the double-taxation scenario. Structure the C Corp so that there are no profits left over -- use all of the write-offs and deductions allowed by the IRS to reduce the C Corp's net income. Offer great benefit plans! Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway. And it may be that in the big picture, the savings on one side outweigh the additional taxes paid on the other side. The decision as to what entity is best for you really does, in so many cases, hinge on taxes, and that is why, with any corporate-related decision, you are wise to seek the advice and assistance of a good CPA. Some quick things to note on C Corps: · They can have an unlimited amount of shareholders, from anywhere in the world. · For Nevada and Wyoming corporations, officers and directors can reside anywhere in the world. · They can have several different classes of shares. · They are the most widely recognized business entity in the world, and are the premier entity for going public. In Nevada and Wyoming, nominee, or stand-in, officers and directors can be utilized, adding extra levels of privacy. While we like and often use S Corporations, we keenly appreciate that C Corporations have their merit and place in your entity structure strategy. Thoughts on Asset Protection: by Garrett Sutton It is no secret that the United States is the most litigious society in the world. That said, it is important to acknowledge that many of these lawsuits are a necessary component of our legal system, and possibly the only means to right many of the wrongs that occur in our society. However, the other side of this is that a certain portion of these lawsuits are based on nothing more than an attempt by one party to generate a financial windfall from a targeted defendant. To help combat such legally permitted takings was born the concept of Asset Protection, the legal techniques of protecting one's assets from judgment. Asset protection is based on the principle that since assets held in your name (minus a few exceptions) can be seized by a judgment creditor, assets not held in your name (and subject to charging order protections) are better protected. Unfortunately, many "experts" who provide asset protection strategies offer services that range from unethical to illegal. Beware of advisors touting Nevada corporations as a way to "hide" from the Internal Revenue Service (IRS) and thus avoid paying taxes. Take for example the recent case against a very high profile asset protection firm located in Las Vegas, Nevada. At first glance, this company appeared to be a legitimate organization providing advice regarding how to protect yourself and your assets from seizure. They had expensive promotional videos and a nice professional looking office. They even had a well known celebrity endorsing their services in a commercial. However, according to a recent court complaint filed by the Federal Trade Commission, if you cracked the shiny outer coating you found that this group was run by two men, one with a suspended law license and the other a convicted felon. Among the many services that this group provided was the option of having their company listed as the sole signatory on their clients' corporate bank accounts in an attempt to hide corporate owners from the tax liability of the company. This, according to the group's marketing materials, helped shield their clients from "capricious federal judges and any government agency". Improperly hiding your assets from the government is not a sound asset protection strategy for several reasons. First, if you owe money to the IRS you owe it. Evading the obligation is a crime. You certainly can use a corporation to minimize taxes and should always do so. But to hide assets and evade taxes leads to big trouble. Second, if you are brought to a debtor's exam, you will be forced to disclose what assets you have under penalty of perjury. A properly designed asset protection plan allows a debtor to disclose what assets they control, without sacrificing the protection of a proper structure. But anyone who advises you to set up a corporation to hide your assets and avoid paying taxes is going to get you into trouble. Also be wary of anyone who is advising you to shield yourself through the use of "bearer shares". Bearer shares are corporation stock certificates which are owned by the person who holds them, the "Bearer", and are not recorded under the owner's name. Some unethical asset protection advisors tout bearer shares as a means to shield the corporation. The IRS has been aware of the practice for a long time and if they catch you using bearer shares to avoid paying taxes, be prepared to take an extended vacation in a federally funded resort with no pool and plenty of concrete. Any ethical asset protection advisor will tell you that the use of the bearer share is a bad idea and is now illegal even in Nevada and Wyoming. If an expert is telling you otherwise, politely excuse yourself and run away - quickly. Further, be aware of advisors telling you it is possible to absolutely bulletproof your corporation from liability. No one can make that claim. There is no magic cloak of protection from liability. That being said, a sound asset protection plan is essential. Although you cannot completely bulletproof yourself due to charging laws and new court decisions, you most certainly can and should protect yourself to the best extent possible. With proper planning and advice, you should be able to adequately limit your personal liability and protect yourself from illegitimate claims and unscrupulous individuals. Improper Accounting: by Garrett Sutton Many new business owners make the mistake of not properly accounting for it all. Please know that companies live and die by numbers. They are defined by numbers. They grow with numbers. They bleed with numbers. Numbers define the health of your business at any given time and over time. To be successful you must have a system to record, classify, report, and analyze your company's numbers. And you must use this system every day (or pay someone who will). Too many new businesses let the numbers slide. They never establish a system for their accounting, they don't write down all the incoming and outgoing money, they forget and/or guess at some transactions, they forget to file necessary paperwork. The main reasons for this are: 1) most of us hate dealing with numbers and 2) time taken on accounting is time taken away from business. The first reason for avoiding accounting (your dislike of numbers) comes under the heading of "too bad." Numbers are a fact of business life. If you don't want to keep track of your accounts, that's fine, but find someone who will. Don't let your aversion suck the lifeblood out of your company. The second reason for avoiding accounting (time taken away from your business) is just, to be blunt, ignorant. Whether you sell a product or a service, sales are what makes the time you spend a business rather than a hobby. And sales are defined by numbers. You need to know what you are bringing in and what you are sending out so that you can set appropriate prices, manage your overhead, market, and make a profit. Without a knowledge of income and expenses, you are leaving profit up to chance. The best way to keep up on your accounting is to have a system - a method or plan - that becomes second-nature with repetition. This won't happen overnight. After all, it takes 90 days to form a habit. And it may take a while for you to find a system, that suits your temperament and your business needs. But once the habit is in place, you no longer have to think about it every day. Regardless of the system you use - computer program, ledger, accountant, book keeper - your system will fall into one of two categories: cash-based method (you count income when it comes in and expenses when they go out) or accrual-based method (you count income when you invoice and expenses when you commit to pay). The difference is timing and can be important if you regularly have inventory or if credit is a part of your business. The accrual method is better under some circumstances, but the cash method is simpler. However, if you make more than $5 million you may have no choice but to use the accrual system, since the IRS may require it. Accounting can be complicated, but it is also predictable. Here is a very basic outline of what you can expect: Every day you need to record the day's transactions. On a regular basis (dependent upon your personality, your business, and your revenue and expense levels), you will want to post all your sales and expenses to a general ledger. Just as regularly, it's a good idea to adjust the ledger so that you don't lose sight of anything that doesn't get recorded on the day of the transaction. At the end of your accounting cycle (usually monthly), when the ledger is complete, balanced, and up to date, post the profits to the owner's equity account. This balances revenue and expense accounts back to zero, preparing you for the next cycle. The cycles add up to an accounting period. At the end of that period, you will compile your financial reports to give a picture of all financial activity during that period. While there is much financial data you will want to keep in-house (and there are regulations stating how long you need to keep different records), much of it is also dependent on filing. If it isn't filed, it doesn't exist. Keep on top of those numbers. Lack of Substantiating Paperwork: by Garrett Sutton All corporations have paperwork that must be completed and kept on file to prove the business and its owners are acting as a corporation rather than an individual. C Corporations, S Corporations, Limited Liability Companies and Limited Partnerships all must have paperwork substantiating their existence as limited liability entities. No matter which entity you choose, you will need, at a minimum, articles of incorporation or organization. But you may also need meeting minutes, a resident agent, a Federal Identification Number, and initial organization filings. In order for a corporation to remain legally and financially separate from its owner (which is the most likely reason you incorporated to begin with), you must have the paperwork that makes your corporation real and proves its existence. And you must file the appropriate paperwork with the appropriate parties (such as government agencies and regulators). However, no matter how carefully you set up your initial corporate documents, no matter how perfect and thorough they are, you aren’t done. There are a variety of filings, records and documents due every year. Forget to file the right papers with the right people at the right time and your company is no longer independent. Paper is all that protects you and your assets from lawsuits. But that paper, done right and right on time, can be like corporate Kevlar. What is the best entity? Using the right entity is an important decision, so we've put together this report to help you make the correct choice. Click here to read more. Nevada Asset Protection Trusts: Are you interested in outstanding asset protection but uncomfortable with the costs and red flags of using offshore trusts? Then read on about Nevada’s new onshore asset protection trust. Click here to read more. Three reasons to use a Limited Liability Company or Limited Partnership for real estate investments: After searching the market for the perfect piece of real estate, you have found property that will satisfy your needs and give you future opportunities. Now is the time to be concerned about protecting yourself from the risks involved in property ownership. Click here to read more. Taxes and kids: It comes as a surprise to some parents that their children may have to file a tax return. Although [most] minor children are dependents of their parents, they are subject to taxes if they receive income. Click here to read more. Trademarks: What is the difference between Patents, Trademarks, Servicemarks, and Copyrights? It is common for people to confuse patents, copyrights, and trademarks. Although there may be some similarities among these kinds of intellectual property protection, they are different and serve different purposes. Click here to read more. Franchise: Many people are interested in franchises, read our FREE e-book Winning With Franchises or call 1-800-700-1430 to arrange an attorney consultation. |