Out of the thousands of business and investment mistakes I have made, some of the worst have involved not properly protecting my businesses, company assets, intellectual property, and personal homes and investment accounts. Over the years, we helped thousands of families and corporations protect their assets, retirements, and legacies, yet I was embarrassingly naive about all of the bad things which could happen in my own world.
As my net worth expanded rapidly, I never took the time to sit down our fleet of attorneys and accountants and ask, "But what if this happens, or this happens?" After decades of fantastic growth, I never got around to implementing many of the strategies which we had formulated for others. I still personally guaranteed everything, all of the business and personal assets were intertwined, and so many entities and properties were held under the same holding companies.
So, when the black swan arrived, the perfect storm, everything went down with the ship. So many terrible events all happened simultaneously, in parallel. We could have never predicted such a confluence, but that is exactly the definition and the experience detailed in Nassim Taleb's 2007 telling business case study, "The Black Swan."
This week, let's help everyone with some simple steps to avoid the mistakes I have made. Also, we need to understand that these strategies apply to your costume jewelry side business just as much as to the million-dollar enterprises. Let's not later lose what you work so hard to build by the bad actions of others who feel, for one reason or another, that you did not service them well, or they don't like you as a competitor, or even if they are simply jealous of your success (schadenfreude!).
Again, your high school or college never taught you these important items, so you must read, read, read to be responsible for your own destiny. You cannot blindly rely on lawyers and CPA's, as we have shown time and again through these posts, because these professionals many times do not know the right answers, and many times their self-interests are not aligned with yours. Here's a short list to get us started this week, and we will cover more details in future posts:
1. Incorporate your business activities for the best liability and asset protection, as well as tax advantages. You can choose from C-corps, S-corps, and limited partnerships, along with many others, but for most of us small business entrepreneurs and property owners, the Limited Liability Company (LLC) will be the most appropriate entity.
2. Although for decades we used Delaware LLC's (incorporated in the state of Delaware), because if there were business problems Delaware's laws were favorable for the corporation, we now feel that Nevada and Wyoming LLC's are the best choices, while California is the worst (imagine that!).
3. Nevada and Wyoming have no state income or corporate taxes, but remember that taxes must generally be paid in the state where the business is being generated. Our investment firm MICG, headquartered in Virginia, had to file and pay income taxes in 42 states - that was a project!
4. Nevada gives the LLC members (owners) the best asset protection from the bad people, requiring charging orders for anyone who wins a lawsuit against the LLC member. This basically means that the successful plaintiff doesn't get to break up the business or take the assets, but gets to be "in that one member's shoes" when distributions are eventually made, if they are.
5. For privacy protection, Wyoming LLC's are ranked #1, but Nevada also does not request or release the owners' information for any civil inquiries or investigations, only for serious criminal actions. This issue is important, not for dodging responsibilities, but for dodging the scumbags of the world, and their scumbag attorneys, who are always attacking business owners whom build any level of wealth. Conversely, these scumbags won't pursue you if they believe your assets are not worth their efforts, either in value or in the trouble to get to. Many people own both Nevada and Wyoming LLC's for their different businesses, or even for different pieces of the same business, simply to deter these "ambulance chasers."
6. Your outside state LLC, such as Nevada, can be "qualified" to own property or run a business in your state by simply registering this LLC with your secretary of state in the same manner you would initiate a new LLC. Or, you can already have a Virginia LLC running a business and have the Nevada LLC own that LLC, for example.
7. Go to the trouble of initiating separate LLC's for different properties or businesses, and do not hold these assets under one umbrella corporation. If a renter at your beach house falls to their demise through a third-floor faulty railing, and your liability insurance is not substantial enough to cover the suit, then the plaintiffs may be able to take that house. But, they won't be able to also go after your Vail ski lodge, unless you had that held in the same entity, or connected to, the beach house. Logistics companies place each truck in a separate entity, with its own insurance, for these same reasons.
8. Make sure you follow the simple formalities for maintaining your LLC shield, so the bad people cannot "pierce the veil" of your corporation. These issues, termed alter ego cases, address people who claim that the LLC is really not a separate entity from you personally. If you are lazy and don't follow these simple steps, people will try to sue you personally for all of your assets. But if you do follow these steps, the courts will most likely protect your personal assets even if the suit against your corporation is successful:
a) Maintain a separate bank account for the LLC, and don't commingle with personal funds and think you will get organized later. Keep everything separate to show the business or property is not you.
b) Prepare separate tax returns, and get an Employer Identification Number (EIN). Again, I urge you to do this yourself so you learn and understand what is truly going on and why, even if you then take them to a CPA to review and approve. Always remember that it is you signing the return, not them.
c) Pay the annual LLC fee ($50-$300), and file the 1-pager annual filing. At inception you also file Articles of Incorporation to initiate your LLC.
d) Prepare minutes of your Annual Meeting, and keep them in your LLC folder in case you ever need to show that you held the required meeting of your members, or maybe of just you and a little Grey Goose.
e) Make sure your LLC is "properly capitalized." In general, this means that you have added the money necessary to pay your creditors and run your business, if applicable.
f) Put everyone notice that you are functioning as a corporation by always signing everything as "Susan Jones, President, Awesome, LLC" Always use the logo letterhead, have Awesome LLC on business cards, etc.
9. We will cover tax advantages in a future post, but here is a short list of things you likely will now get to pay for with pre-tax dollars (Download the current Publication 334, "Tax Guide for Small Businesses"):
a) Startup expenses such as attorneys, CPA's, printing, office expenses, licenses.
b) Salaries, rents and utilities (% of home for home offices), % of automobile, cell phone, laptop, supplies.
c) Travel, meals, health & life insurance, retirement plans.
d) Dependant care, education, dues, subscriptions.
Well that's enough for one week. I wanted to give you the "30,000-foot-view" of taking the initial steps for protecting your creations, and to give you a glimpse of the incredible wealth-building attributes of owning your own corporations. In future Posts we will also cover Irrevocable Trusts to add to the mix once your Awesome, LLC is printing tons of money. This is how you build long-term wealth: Ownership, legal tax advantages, and building equity value instead of focusing on high current income. And, here is the part where I have to remind you that the above is not tax or legal advice and for you to consult your own advisors, as I am not a CPA or an attorney (thank God!). Have a great week!
"For whom the gods wish to destroy, they first call promising." - Cyril Connolly
* Many thanks to the WSJ, Forbes, Fortune, and to Garrett Sutton, an asset protection expert, and his firm, Corporate Direct. I highly recommend his services and their many books published on the above topics.
** For more information on Jeff's Books, Blog, and Legal Challenge, please visit www.jeffmartinovich.com.
** To access JAM Views directly please visit jeffreyamartinovich.blogspot.com
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