The Limited Liability Company, or LLC, traces its roots back to the German law of 1892 authorizing Gesellschaft mit beschrankter Haftung, or GmbH.  Once established in Germany, other countries from all around the world followed suit.  In 1977, Wyoming became the first US state to enact a true LLC act modeled closely after the 1892 German GmbH code.  Today, LLC’s, or the local variation thereof, are the most widely used form of business ownership around the world.  They are also the most widely misused.

Most entrepreneurs take great care in starting their company, but forget about the dual nature of asset protection and therefore neglect to properly structure their LLC.  Not only do you want to protect your personal assets from the activity of the business, you also want to protect the business, and thus your income, from your personal activities.

This is where a properly structured LLC comes into play.  If you are registering an LLC in the US to conduct business and/or to own assets there are the 3 main considerations;

• Register in a state that only allows creditors a charging order as the sole remedy by statute
• Register in a state that allows anonymous managers, or at least use a nominee manager
• Make sure you have a rock solid operating agreement

Step one is to register the LLC in a state where a charging order by statute is the sole remedy for a creditor to collect distributions from an LLC.   There are several states that only allow creditors a charging order as the sole remedy, but not all of those states are a good choice due to other factors like excise taxes or capital values tax.  Due to the nature of the charging order (in the proper state), creditors are only entitled to distributions, but cannot force a distribution, take ownership of assets, foreclose on business assets, or be granted membership interest in the LLC.  This means if your assets are held in a properly structured LLC, your creditor can only gain rights to your distributions, but as manager, you can elect to withhold distributions to member(s) leaving your creditor with a tax liability.  In some states, like CA, creditors can foreclose on business assets held in an LLC or even be granted a membership interest allowing them to gain control over the assets.  You don’t want to register in those states.

Step two should be to register your LLC in a state that allows anonymous managers, or at least utilize a nominee manager.  In most cases this veil of privacy is enough to keep the wolves at bay.  Imagine getting into a car crash.  Nowadays the first reaction of the ‘victim’ is the grab their neck or back and claim an injury.  Of course their attorney will run a public record search for your assets to determine his ‘payday’.  If there is no fat piggy bank to smash, in most cases he will not pursue you beyond the limits of your insurance.  By simply making your assets invisible to public record searches, this puts up a significant roadblock. 

And step three is to make sure your operating agreement is rock solid.  Last week I discussed the operating agreement and what constitutes a good one (if you didn’t receive last week’s newsletter, feel free to send an email requesting the April 22 issue).  I can’t tell you how many entrepreneurs that cross my path who either have no operating agreement all, or the one they do have is so inadequate, they might as well not have one.  At least 90% of the operating agreements we review for clients are completely useless.  Most are 7-10 page boilerplate agreements that offer no asset protection whatsoever.  That is just not enough space to spell out a contractual obligation.  Ours is approximately 70 pages.  The operating agreement is the contract between you and your business and is the first thing the court requires for guidance in dealing with your assets.  In the absence of a good contract, you are at the mercy of the court should you find yourself to be a defendant. 

With proper asset protection planning, the LLC can be a very useful tool in minimizing your risk.  There are many creative ways to use LLC’s for structuring your assets like using a Nevis LLC to own your domestic LLC thereby giving you an additional layer of protection and making your assets completely invisible.  You can also use a combination of LLC’s to segregate business assets or strip equity from real estate using liens that you control.  If you have any questions or would like to schedule your free 30 minute consultation, feel free to contact me either by email or phone.

Joe runs a custom t-shirt company from California and sells his products all over the world through his website.  Joe has a very successful business and sells $2m per year in t-shirts with a 30% net profit margin earning $600k per year after his $100k per year salary.  After Joe takes advantage of his tax benefits, he pays 30% in tax or $180k.  That is a rather large check to write each year.

Today, Joe runs his business from Nevis.  He formed a Nevis LLC, rented a small office in Nevis to hire an administrative staff there to handle bookkeeping and customer service.  He sold his computer servers and has outsourced his server space to a firm in India.  He does all of his banking through Denmark and uses Paypal for website payments.  He has essentially severed all physical business ties in the US.  Granted, Joe still lives in California and still earns his $100k per year salary, for which he still pays his personal income tax. 

However, Joe no longer pays income tax on his $600k in net profit, saving his company $180k per year in taxes.  Joe now has reinvested his earnings into his business and expanded into a web based golf shop.  The golf shop operates on the same premise as the t-shirt shop and allows him to grow his business and his profits.

When Joe decides to repatriate some of his income from his offshore business he will certainly pay income tax on that amount.  But until that time, Joe can defer the taxation and invest his money as he sees fit in order to continue to grow his wealth. 

I understand this program doesn’t work for all of you.  In reality, it can only work for a few.  But for those few, it is a tremendous advantage.  For those of you that cannot take advantage of this, maybe it can’t be an option for your next business venture.  Certainly there are many variables to this situation and each must be individually evaluated. 

If you think this may work for you or if you have any other questions regarding your asset protection plan, contact me via email or at the number listed on our contact page.   Until next week, live well.

There is nothing illegal or immoral about offshore asset protection.  In reality, it is not even difficult or complex as many would have you believe.  In many cases it is as simple as establishing an offshore entity to own assets you already own like stocks, bonds, gold or private company stock.  In some cases it involves the use of trusts.

I have touched on the tax benefits and how that can be a significant benefit, so I won’t dive into that too deep here.  But if your business meets certain requirements, it is possible to move it offshore and defer taxation…indefinitely.  One of the biggest threats to your wealth is destruction through taxation and this tool can offer you the ultimate in offshore asset protection.

Aside from tax benefits, what are the other benefits?  The ‘what’s in it for me?’ question.  Another major threat to your wealth is litigation.  Litigation poses a huge threat and takes up an enormous amount of resources in the modern age.  In recent reports, litigation amounted to 2.3% of our GDP.  Think about that for a minute.  In 2009, the US GDP was approximately $14T, which means litigation cost US citizens and businesses about $322B.  To put that in perspective, Norway’s 2007 GDP was 391B. 

My point is, litigation is a very real threat to your wealth and a very large cost.  As your wealth grows, so does the size of the bulls-eye on your back.  This is why proper asset protection planning is critically important.  And an offshore strategy is not just for the super wealthy and criminals.  It can be for you as well.

Let me illustrate a simple example.  Fred owns a small business in rural Kansas.  Fred has owned it for many, many years and has accumulated about $2m that he has begun investing in the stock market.  Fred also owns a home with land in Kansas.  Fred has a nice life, a good income, and a fair amount of investments. 

If Fred is in a car accident and the other driver is injured, the plaintiff attorney, Lucifer, will want to find out what Fred is worth in order to determine if he is to pursue Fred beyond his insurance limits or just drop it there.  Lucifer finds out Fred owns a house, a business, and a $2m investment portfolio, all in Kansas.  Easy pickings.  Lucifer takes Fred to court, court issues judgment, and Fred is cleaned out.

Fred’s neighbor, Jacob, also owns a small business in Kansas.  Jacob also has amassed a $2m investment portfolio and a nice house in Kansas.  But Jacob has moved ownership of the shares of his business to his offshore entity.  His offshore entity also owns his investment account, which is held in a bank in Luxembourg.  Jacob’s house is owned by a NV LLC, and the NV LLC and the offshore entity are wrapped up into an Integrated Asset Protection Trust (IAPT). 

While Fred and Jacob are in similar positions, assuming Jacob also has a similar traffic accident, they are in much different situations after the accident.  First of all the plaintiff attorney, Lucifer, will likely find too many roadblocks in front of Jacob’s wealth to attempt to pursue.  Where does Lucifer file a lawsuit?  Kansas, where Jacob lives?  NV, where his LLC that owns his home is registered?  Belize, where his offshore entity is registered?  Luxembourg, where his investment portfolio is held?  or Cook Islands, where his trustee office is?  As you can see this is quite a dilemma and the roadblocks are many for poor Lucifer.  Meanwhile, Jacob is safe and sound at home, sleeping peacefully knowing his assets are well protected.

Don’t be Fred.