Center for Estate Planning and Asset Preservation
Center for Business Law and Commercial Real Estate
HAUGH LAW GROUP
Scott Haugh, JD
Roselle, IL 60172
Valerie Haugh, JD
Roselle, IL 60172
Structuring your Asset Protection plan starts by looking at the activities conducted by your business and categorizing them by the risk involved. Then, we separate the risky activities from the safe activities, and make sure the risky activities have as few assets as possible.
Bill owns a local delivery company (“Del Co.”). He has incorporated his business because his lawyer said it gives him protection. His company owns a small industrial building, all the equipment used to run the business (i.e. forklifts, office equipment, computers, etc.) and fiver delivery vans. He carries $1 million in liability insurance.
One day a driver causes an accident resulting in a $2 million judgment against the driver and Del Co. The driver/employee has few assets, rents an apartment and has $348.29 in the bank. He owes more on his personal car than he can sell it for.
The Predator Attorney ignores the employee and comes after Del Co. After the $1 million insurance is paid, Del Co has another $1 million in liability. The judgment creditor attaches all the assets of Del Co:
Equity in building $200,000
Equipment – $50,000
Vehicles – $50,000
The attorney forces the sale of the building and all equipment and the vehicles. While Bill can always rent space and get new equipment and vehicles, due to the interruption in his business caused by the lawsuit, he has lost clients and will have to start all over again.
Although the corporate structure can protect your personal assets from being reached by a judgment creditor of the corporation (“Inside Liability”), it does not protect assets owned by the corporation from being reached by a judgment creditor in the event of a judgment against the owner of the corporate shares (“Outside Liability”).
Now let’s take a look at a different way the business could have been set up.
- Del Co. operates a local delivery company. Del Co is owned by Bill.
- The warehouse is owned by Property LLC. The LLC is owned by Bill.
- The equipment is owned by Equipment LLC. The LLC is owned by Bill.
- The vehicles are owned by Vehicle LLC. The LLC is owned by Bill.
- Bill also owns another LLC, Finance LLC, which operates as a financing company.
The warehouse was purchased by Property LLC and financed by a traditional commercial lender. The down payment was loaned to Property LLC by Finance LLC. After the closing, Finance LLC placed a second lien on the warehouse to secure repayment of the loan. Del Co rents the warehouse from Property LLC.
The equipment was purchased by Equipment LLC with a loan from Finance LLC and is leased to Del Co. Finance LLC has lodged UCC financing statements to secure its lien on the equipment.
The vehicles were purchased by Vehicle LLC with an auto loan from the bank guaranteed by Bill (or they could have been purchased by Vehicle LLC with a loan from Finance LLC). The vehicles are leased to Del Co.
Each month/quarter, Del Co makes lease payment to the different LLCs. The amount of the payments would be in an amount equal to the usual profit from Del Co. The LLC’s make payments to Finance LLC, basically shifting all Bill’s profit to Finance LLC, an entity with virtually no risk.
Now let’s go back to the same example and see how things turn out. When Predator Attorney looks into the corporate assets, he discovers that Del Co leases the building, all equipment and the vehicles. Del Co has minimal cash in the bank since it is all paid out to employees, expenses, and the lease payments.
After reviewing the situation, Predator Attorney instead decides to go after the vehicle owner, Vehicle LLC. However, he discovers that the vehicles have little equity. Vehicle LLC has $246.87 in the bank.
Now Predator Attorney is really ticked off and decides to try to pierce the corporate veil and go after Bill’s personal assets. However, in addition to having his personal assets protected (see Basic Level Protection), Bill has subscribed to our Corporate Protection Program where for a small monthly fee, we helped him comply with all corporation formalities (i.e. resolutions, annual meetings, documented minutes, timely filed annual reports). The suit is dismissed on Summary Judgment.
The insurance settlement is the plaintiff’s only recourse. That’s why you pay your monthly premiums and rely on The Asset Protection Law Center for full Asset Protection.
If you want to set up Barriers to protect your Nest Egg, click here to Contact Us to set up a free 30-minute confidential consultation.
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