What is the point of having an LLC if it doesn’t do what it is intended to do? And yet so many people mess this up…
In today’s article I will outline for you the key rules and concepts to live by relative to your LLC in order to ensure your asset protection plan is as effective as possible. Regardless if you chose an LLC, Sub S or C Corp, these rules apply. As always, please consult your tax and legal counsel before you act.
Veil-piercing is a legal concept whereby the formation of an entity is disregarded for the purposes of assessing liability. In plain English, if there is a judgment they can take your cash, other real estate, and stocks. Most states do have a basic exemption statute that will protect you a little or even your personal residence, but the key is that we really would prefer not to have to fall back on that. And we don’t need to as long as we do everything properly and by the book…
You CAN be proactive to ensure your LLC or other entity will stand up to scrutiny if you observe the following do’s and don’ts:
1. Keep the filing fees and annual reports of the entity up to date.
2. Maintain a separate account where all the bills of the entity are paid out of.
3. Keep minutes for C-Corps.
4. Maintain basic liability protection*
*This is NOT a legal requirement but very wise in practice. Most veil-piercing cases are some sort of tort, i.e. injury or wrong doing. If liability insurance is in place the deciding parties will be less motivated to crack your shell.
1. Misrepresent one entity as a division of another.
2. Co mingle personal or other entity funds in the same account.
3. Lapse on the state reporting fee’s.
4. Engage in fraud generally.
5. Pay personal bills out of the business account or vice versa.
6. Leave your entity so cash poor it cannot meet its obligations.
Happy investing and just remember its not whether you have an LLC…its if you observe corporate formalities that really matter in asset protection planning.
Douglas Dowell J.D. is commercial and multi-family investor. His areas of expertise are raising money legally, risk mitigation with due-diligence, and management science. Douglas is an avid student of success principals with a focus on modeling success factors.
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