Your Business Is Your Baby; Protect it
December 17, 2012
By: Barry E. Haimo, Esq.
Did you create a business and naively assume that simply creating a business entity like a corporation or LLC would protect you? If you did, what’s done is done. Right? Wrong. If you still own your company or your interest in your company, it’s not “water under the bridge”.
Here’s why correcting it should be a priority to you. Watching our videos and reading this post will give you a handle on why this issue is important in general. Now we’re going to dive deeper to give you a better understanding.
Suppose you have an existing business. You formed an business entity like a c-corporation or s-corporation, limited liability company (LLC), limited partnership (LP) or other entity. It may protect you from creditors of the business, like dissatisfied customers, victims of personal injury on the premises, or contractual disputes with vendors, suppliers and employees, etc. It includes liability of the business for whatever reason.
Consequently, your entity does NOT protect you from your own personal creditors, who are people that are suing you for committing a wrong that is unrelated to your business. It simply requires someone obtaining a judgment against you personally for whatever reason. The most common example would be a car accident where your auto insurance is insufficient to cover the costs of or damages to the other party. Judgments can be obtained for a variety of reasons, including breach of contract, negligence and intentionally trying to harm or offend others. It does not matter how someone obtains a judgment against you. What matters is how it’s enforced to satisfy what the creditor is entitled to be receive or be paid to be made “whole” again.
Do you have a friend, family member or colleague that has experienced an issue like this? How did the creditor satisfy its judgment? Did the creditor take their car, garnish their wages, compel the sale of their personal or real property? A judgment creditor has a lot of resources available to him/her to satisfy a judgment, and sadly, there are plenty of attorneys out there who would be delighted to help them collect. It’s relevant because a creditor may take your business away from you if structured improperly.
Yes, a creditor can take your business away from you if you don’t protect against it. A c-corporation and s-corporation is considered personal property. Like your Google stock, it can be taken away from you fairly easily. It’s simply a transfer of ownership of the stock certificates to the extent necessary to make the creditor whole again. That may not terrify you if they are actually taking your Google stock, especially if you purchased it recently, but it will if they are trying to take your family business, or your “baby”.
You see, the stock certificates are paper, but the paper has significant rights attached. Whoever owns the certificates gets to vote their shares, and voting means electing directors who appoint officers who run the day to day business operations. In other words, owning the certificates mean controlling the business and the business’s future.
If you’ve built the business from the ground up, then it’s your baby. Accordingly, the last thing you want is for your baby to be taken away from you because you failed to take advantage of the technicalities in the law. Worse, what if you have partners – family or friends – that now are partners with your creditor. He or she may be a total stranger with no knowledge of your industry and even less business experience. You are not afforded an opportunity to buy back your shares. Your business and everything associated with it, including the name, logo, model, relationships and ideas you have to further develop it – may be gone forever.
The remedy is to utilize a different business entity or combination of business entities in an asset protection plan to better insulate and isolate your assets and protect yourself and your business. This will limit the remedies that are available to creditors of you personally and is therefore more favorable to you, your family and your business. You will gain leverage over a creditor by forcing it to climb uphill to collect. You may even subject your creditor to income tax liability on the interests he is not even receiving (called phantom income or phantom tax liability). Moreover, you can execute strong governing documents and contracts to ensure that your business has protective spikes.
To protect your business, the cost may be some legal and administrative costs up front and slightly higher tax liability. While some businessmen live and die by the numbers, others have more of an emotional attachment that they want to protect at all costs. I’m not saying this is for everyone, but everyone should understand the rules of the game before making that decision.
At Haimo Law, we believe that great offense stems from strong defense. We help you form (or convert) entities and craft strong documents to protect you from the issues you know about, and the ones that may blindside you that you don’t know about. Remember, these plans must be crafted and drafted properly. Do them right so you can sleep at night. Call us so we can help you protect what you value most.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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