You Should Operate Your Business As A Sole Proprietorship
Many attorneys and/or accountants recommend that their clients operate their business as a "sole proprietorship" because of the simplicity it presents when they file their tax returns. However, there are two major problems with operating as a sole proprietorship. First, while a sole proprietorship allows a person to deduct most business expenses, there are tax deductions and reduction strategies that apply to S-Corps and C-Corps, which can't be used as a sole proprietor. The second major problem is that a sole proprietorship provides zero protection against lawsuits. If your sole proprietorship is sued, all of your business and personal assets can be taken. Even if you are sued personally, as a result of a car accident or injury at your home, all your personal and business assets can be taken.
A Corporation Protects Your Assets From Lawsuits
The corporation is a good management and tax reduction tool, but it is a poor lawsuit protection tool. If your corporation is sued, all of the assets owned by your corporation can be taken to satisfy the judgment. The corporation does provide some protection of personal assets with what is called the "corporate veil." The corporate veil is supposed to prevent a creditor from going after personal assets to satisfy a business debt. However, the corporate veil is often easily pierced, enabling your personal assets to be seized to satisfy a judgment against your business.
I Don't Think I Will Ever Get Sued
For most professionals it is not a matter of "if" you will get sued, but "when" you will get sued. Statistically the odds of avoiding a lawsuit are very small. It is estimated that a lawsuit is filed every thirty seconds in the U.S. Not protecting your assets against lawsuits would be like living in an earthquake, hurricane, or flood zone and not purchasing the necessary insurance to protect your assets. Once the disaster hits, it is too late to buy insurance. Likewise, once a lawsuit hits, it is too late to set up the legal structures. You need to get them in place before the disaster hits. Once a lawsuit is filed against you, the transfer of assets to limited partnerships may be interpreted as "fraudulent conveyance" and can be unwound. Therefore, it is essential to get the legal structures in place before you are sued. Now is the time to ensure that your assets are safe and secure.
100% Asset Protection Is Impossible
Advisors will often tell their clients it is impossible to protect 100% of their assets in the event of a judgment. Advisors will also tell them that some strategies and techniques might slow the judgment collection process down, but that they can't prevent their professional or personal assets from being taken once a judgment has been made against them. They might also advise the use of some simplistic asset protection strategies that will not totally protect them because that's all they know. The truth is, there are tools you can use to achieve 100% asset protection.
You Should Put Your Assets In Your Lower-Liability Spouse's Name
One of the most frequently used strategies, recommended by less-than-experienced advisors, is to put assets in a lower-liability spouse's name. This may provide a modest amount of protection in the event of a lawsuit, but there are four significant drawbacks to this strategy that would leave the assets vulnerable in all 50 states. First, it must be realized that courts carefully scrutinize conveyances between relatives and can invalidate the transfer of property regardless of when the conveyance took place. Second, your spouse may be declared an implied officer in the corporation and be named in a lawsuit. Third, your spouse could get sued personally. For example, if your spouse were involved in a car accident and someone was killed, a lawsuit would most likely follow; and every single asset in the spouse's name would be at risk. Finally, having assets in your spouse's name can cause serious problems in the events of a divorce. With the divorce rate at over 40% in the U.S., this is a factor to consider.
My Local Attorney Can Set Up My Asset Protection
Even though there are more than one million practicing lawyers in America, less than one percent claim asset protection as their specialty. In fact, many legal and financial professionals simply do not have the specialized knowledge required to implement all of the right strategies, entities, and document language needed to provide 100% asset protection. Attorneys will often use language in their documents, which will actually hurt the clients in a lawsuit. In recent years, many attorneys have expanded their practices to include asset protection or, if asked, will tell you they can do the work for you; but most have minimal experience and expertise on the subject. If your personal attorney has not already recommended that you place your assets into properly-drafted limited partnerships, isn't it time you question his or her asset protection expertise? Research found in the book, The Millionaire Next Door, concluded that "your ability to hire high-grade financial advisors is directly related to your propensity to accumulate wealth." The American Society for Asset Protection works with the highest grade and most experienced asset protection lawyers in the country.
A Single Entity (LLC Or Corporation) Is All You Need
Typically, a combination of entities will be the best course to take, rather than the use of one corporation, LLC, or limited partnership. Most advisors are unaware of how to gain the best tax advantage and ensure 100% asset protection through the use of multiple entities. The strategy of using multiple entities will minimize taxes and protect 100% of your assets.
Liability Insurance Will Protect Me Against Lawsuits
You may feel that you are protected from lawsuits because you have liability insurance; however, insurance is like a hospital gown—you only think you are covered. Liability insurance does provide some protection against lawsuits, but it is limited in its coverage. Juries often will award judgments in excess of liability insurance coverage. Exclusions in your policy may also result in your insurance company denying coverage and leaving you liable. For example, a physician had $1 million in insurance coverage. When the jury awarded $2.1 million, the physician was liable for the remainder. At age 63, he lost everything. If his assets had been structured properly, he would not have lost any of his personal or professional assets. As judgments have increased over the years, some advisors simply tell professionals to get more liability insurance. This is problematic, as larger policies are costly and often serve as homing beacons for trial attorneys, who look for the deepest pockets in which to reach.