Course 1: Asset Protection

Transcript:

Adam:

Thank you everyone for tuning in today to this great webinar we put together for you. As we operate businesses and work as investors, we always have to be concerned about protecting our assets. It's just the world that we live in. So I wanted to put together a great presentation for you today.

And before I begin, let me give you my legal disclaimer. This information is not intended as tax or legal advice. You should additionally consult with your professional before implementing any of the structures or strategies that we're going to be talking about today.

My name is Adam Kintigh. I'm with NCH. I'm an Executive Corporate Analyst. I've been here 15 years. And I always tell people I am not good at much else. But anything you need for asset protection, taxes, legal, credit, that's what I do. So our firm, NCH, is now in our 33rd year in business. We have an A plus rating with the Better Business Bureau.

The backbone of our company is we form corporations and LLCs. But in-house, we have a full legal department. I have one of the best CPA firms. We do tax and accounting for business owners and investors all over the country. We have a business credit team. If you ever want to separate business credit from personal credit, we have a team that does custom business plans.

We do estate planning like trust and wills, and financial planning. We do self-directed IREs and self-directed solo Ks. So it's all the support services for businesses and investors that I specialize in. Like I said, I've been doing this for now 22 years, both NCH last 15 years. So as I go through this information today, you're really going to start to feel this sense of urgency and making sure that you're doing things the right way from the beginning.

And by show of hands, how many of you want to do things the right way from the beginning? It's so important. It's always the little mistakes in the beginning that get really costly later on. So in the chat box, if you have questions, go ahead and type those in as we're talking today. If for any reason I am not able to get to your question on this webinar, Then I will contact you afterward, and we'll go over these things.

So make sure any questions you have, write those down, type them in the chat box, and we'll make sure we cover those. So the first thing is what we're going to cover today. As I go through this presentation, we put together, which is on how to protect your assets using corporate entities. And you hear a lot of structures and strategies. And my view is to keep it simple. We step back and look at why do we need asset protection and what assets are you looking to protect? And I love using this example. Imagine a guy is driving down the road, runs through a stop sign, and T-bones a car. The guy he hits ends up in the hospital with some broken bones. “In a wreck, need a check. If we don't win, you don't pay.” And go turn on your morning news and see how long you can go without seeing an advertisement from an attorney. So, imagine a guy is driving down the road, runs through a stop sign, t-bones a car. The guy he hits ends up in the hospital with some broken bones.

The first thing he does is call that accident injury attorney. And before the attorney takes the case, he is going to do an asset search. And let's figure out. The guy that ran this stop sign, what does he have that we can take? And it used to be to do an asset search, it took a lot of time and a lot of money. We have to hire private investigators to go dig through county records and try and figure out what you own. Now we have Google. If I have your name and social security number within three to five days time, I will know everything about you. And if I don't have your social for an extra 50 bucks, they'll get it for me.

So this attorney does his asset search and he realizes the guy who ran the stop sign has nothing. Does the attorney stop there? He says, now hang on a second. The guy that ran that stop sign, was he by chance working for a company? When this accident took place, if so, I can sue the company that he works for.

Did he have any alcohol in his system? If so, I could sue the bar or restaurant that served him. Did he have any prescription medication in his blood? If so, I could sue the doctor who prescribed it, the pharmacist who handed it to him, or the drug manufacturer. And that stop sign he ran. Was it free of obstruction or was there something blocking the view of this stop sign?

If so, I could sue the homeowner where that stop sign sits. And come to think of it, how many accidents has there been at this intersection? We might be able to sue the city or county for not having a stop light instead of a stop sign. So it is very unfortunate, but we live in a world that it has gotten so far away from suing someone that's done something wrong to just trying to tie in the deep pockets. And most attorneys, if they can find 30, 000 of equity somewhere. They'll take the case for free. So we want to make sure we're protected and as we go through this kind of the what happens a lawsuit so incident happens gives rise to a lawsuit first thing wherein a complaint gets filed and that's where the nightmare begins.

The attorneys start going through requests for information and interrogatories, it is expensive and super time-consuming if a case actually goes to trial which could be three to five years And what I've learned is that if a case doesn't settle within the first three to six months, it's usually going three to five years.

And the attorneys are always trying to settle right before trial because they have no idea who is going to win. Is it the guy telling the truth? Is it the guy lying? You know, there are three versions of the story. My version, his version or her version, and the truth and no one ever knows. So they want to avoid trial at all costs So once that happens if they win they get a charging order and I want you to remember that we're charging order that is a judgment against you or your business and then they start to collect on these assets or collect on the judgment. So as a business owner or as an investor the smartest thing you can do is take preemptive action strategies and set things up ahead of time to protect you and your family in the future so that you're not seen as the deep pockets.

We do that by forming a corporation or LLC. And think of this, you own the company or you own a corporation, you control the corporation, but legally you're not the corporation. So over all these hundreds of years that corporate structures and strategies have been used, it is meant to encourage capitalism and they get special benefits, special legal benefits, special tax benefits.

This is to encourage economic growth. Whether it's starting a business or owning investments, you get these special protections. So, it's so important that as a business owner, we want to separate ourselves from our liability, our business, and our investments, and that is the corporate veil, which is the legal protection between you and the company.

So, what do we need protection from? Well, first of all, accidents happen all the time. I was driving home for lunch today. There was a semi-truck stopped in the middle of the 215 freeway, a guy off to the side of the road, airbags deployed. I have no idea what happened, but on my way back from lunch, that freeway was packed up and backed up for probably hours because of this accident. Accidents happen.

Secondly, employment litigation is huge. If you have employees, whether they're W 2 employees or even independent contractors, you deal with these people, the chances of litigation are very high. Additionally, think about contract disputes, whether it's a contractor you hire an employee that you're paying, or even a customer.

Contract disputes happen all the time and they're slips and falls, for example, someone slips and falls at the grocery store or wherever it may be these accidents happen. Of course, as innocent as you may be, if you own the property, you are responsible and people always say, well, Adam, this is why we have insurance, and on top of that, I have an umbrella policy makes you think that umbrella covers everything while the newsflash, the umbrella policy only kicks in if the underlying policy exhausts its policy limits. So, generally speaking, you can get a million-dollar general liability policy for between 1, 000 and 1, 500 a year depending on the area of the country you're in.

I can get a million-dollar umbrella policy for 200 to 300. Why is that umbrella so cheap? And the answer? Again, it only kicks in if the underlying policy exhausts its policy limits. So I tell all my clients, to keep good insurance, but remember, the insurance companies have adjusters and attorneys whose job it is to pay out as little as possible on claims.

So we want to make sure that we're operating through a corporate entity so that we get that legal separation, that corporate veil. So think about the corporate veil as the Great Wall of China. You are on one side of the wall, your business is on the other side, and that great wall is the corporate veil.

That's the legal separation between you and your company. The strength of that veil is decided by the state that you incorporate in. So many of you have heard people say incorporate in Delaware, incorporate in Nevada. Well, it's true. Delaware has the best laws in the country for big business. Microsoft, Walmart, Disney, and all the big companies are Delaware corporations.

However, because Delaware makes so much money off big businesses, they have nothing special for small businesses. That's where Nevada came into play. So thanks to the mob, no joke, back in the 1950s and 60s, when the mob came to Nevada, they started heavily influencing our politicians to create all these great laws to protect their business operations.

And even though the mob officially moved to Wall Street back in the early 90s, Nevada kept its laws strong for small businesses and became a big revenue generator for our state, Which of course, everyone wants to protect that revenue. So, we'll talk about the some more about Nevada here in a second, but the most important thing is that care must be taken to preserve the corporate veil. If the corporate veil is pierced, your company would have no protection value whatsoever.

I found this article, it's from the Wake Forest Law Review, it said that piercing the corporate veil has become the most litigated issue in corporate law today. It is the plaintiff's intent to always acquire the personal and business assets and at least half of them win. So with that being said, even though you form a corporation or LLC, it is not absolute. It is limited protection and there are all these ways of piercing the veil. So the first thing I've studied this for many, many years, and in pretty much every state in the country, there's anywhere from six to 10 ways of piercing the veil.

I have read hundreds of court cases and. Normally, every single case where the bill is pierced is an alter ego. You own the LLC. You control the LLC. You are the LLC. This is nothing more than a sham. And that alter ego is a really big deal. But ultimately, again, it's up to a judge to decide whether or not you should be held liable.

And our court system seems to play Robin Hood, taking from those who have and giving to those who have not. So we're assuming that you even have a corporation set up properly, to begin with. There's corporate compliance, which most people have no idea about. So, first of all, when you form a company, We have to properly form your documents.

Articles of incorporation if it's a corporation, articles of organization if it's an LLC. You have to have bylaws for a corporation and an operating agreement for an LLC. You have to have a record book with a corporate seal that you stamp on documents to make it official. It's like your company's signature. You have to have stock certificates or membership certificates that are actually issued to someone and oftentimes people form their own company and they don't have any of these things and the veil gets pierced. So I was teaching at a class in Dallas, Texas, and it was right before the pandemic hit. And at class, a guy came up to me and said, Adam, I hear you talking about the corporate veil being pierced 50 percent of the time.

That was a statistic that I used. He said, and by the way, veil piercing is only for small businesses. When you have five shareholders or less, that's when we worry about veil piercing. Well, this guy said, Adam. I am an attorney here in Texas and I am in the business of suing businesses. He said I actually specialize in piercing the corporate veil.

And if I see one or two, even three people's names on record, he said I pierce the veil almost 95 percent of the time. He said nobody ever sets these things up right. They never maintain them properly. We have had a huge success in veil piercing. So with that in mind, corporate compliance is a really big deal.

Additionally, once you form the company, resolutions, amendments, meeting minutes, and the formalities that have to be followed along the way to maintain that protection. Well, these are the different entity types that are out there that you can select. You could be a corporation, you could be a C corporation, which is generally big business.

Microsoft, Walmart, you're selling stock, raising capital, usually that's a C corporation. Bad from a tax standpoint for a small business. Double taxation. The company pays taxes, it pays you, and you pay taxes. S Corporation is generally the preferred taxation, for a small business. LLCs or Limited Partnerships are also an option.

I personally used to use corporations for active income. If you're an independent contractor, you're selling widgets, it's active income, I would use a corporation. If it was passive income, I would use an LLC. Well, over the years, the laws have changed and I pretty much use LLC for just about everything.

It is great if you have a partner in the business if you have real estate investments, or any business activity, LLCs are great because if it's set up properly. We write into the operating agreement here at NCH that your only legal requirement is you have one board meeting every year. That could be at your kitchen table, or it could be in Hawaii, but you gotta have one a year.

And there is no legal requirement that any details of this meeting be documented. We only have to document that the meeting was held and you were present or you and your partner were present. That is it. So when it's time to renew, we send out the renewal notice with your annual meeting minutes. You can literally write on that page.

The LLC will operate the same this year as it did last year, sign it, date it, put it in the record book, and that is it. So very simple to set up, very simple to maintain, and we get to choose how we want the LLC to be taxed. We'll have another class or another webinar on the taxation side of things but for right now LLCs are great.

We have a lot of flexibility now we talked about the road to asset protection beginning in Nevada and here is the why. So Nevada, all the laws that have been crafted over the years. I told you about the mob they came and heavily influenced our politicians to create all these great laws Well, the first thing is that Nevada has the strongest corporate veil.

To pierce the corporate veil in Nevada is not a list, of six to ten ways that a judge gets to choose from. They have to prove that you are intentionally committing fraud. It is to prove fraud or manifest injustice, which requires the courts to go inside your mind to determine your ill intent.

We have just a handful of veil-piercing cases. We have a few cases where Ponzi schemes, like the Bernie Madoff deal. We have a few cases where guys were selling mining rights for land that was owned by the Bureau of Land Management. It's like you or me trying to sell the Statue of Liberty.

The bottom line, you're not committing fraud. They will never be able to pierce the veil to sue you personally. Now, second and more important, Nevada is the only state in the country. That provides us with a law called charging order protection by statute for both single-member and multi-member corporations and LLCs.

It is a really big deal. So let's say that we set up your company and so you live in California and I set up a California corporation or a California LLC. An accident happens, and the insurance company says, sorry, we don't cover that, which happens often. If the plaintiff can demonstrate that you're not able to satisfy the judgment within a reasonable time frame, which is within 90 to 120 days, judicial foreclosure begins.

The courts will start foreclosing on cash or assets held by the LLC to satisfy the judgment. And in a lot of states, if your corporation or LLC does not have enough cash or assets, This has created an injustice and they must pierce the veil to prevent the injustice from occurring. Well, under Nevada law, the charging order or the judgment they will receive is the exclusive remedy of the judgment creditor, eliminating the possibility of judicial foreclosure.

So, you become the worst nightmare of these attorneys. They can sue and they can win, but they can't get paid. They can't pierce the veil, you're not committing fraud. Can't foreclose on cash or assets. They are stuck with a judgment, hoping you someday distribute a profit. And the lawyers know the game.

First of all, if you have a business, corporation, or LLC, that business will most likely never make another dime. You may have to start a new business. If you had rental properties, you have a debt to service, you have mortgages on the properties, and you do not have to distribute a profit. So the lawyers know this, and they want to stay away from suing a company that has Charging Order Protection. They're way better off going after the insurance.

Additionally, this provides us with reverse piercing. What goes hand in hand with the Charging Order Protection? No reverse piercing. If you get sued personally, you get brought into a deposition, you gotta list everything you own. Your house, your cars, and you own the corporation or the LLC which becomes an attachable asset just like anything else. They sue you and take the corporation or LLC that has your business or your investments. Well, under Nevada, by law, they can sue you and they can win. They cannot touch that LLC to satisfy your personal debts and obligations. It protects the LLC from you.

Now, one of the things we do unique and differently here at NCH is when we're forming a Nevada corporation, our law says that these are NRS statutes that read that you may be indemnified. The keyword being may, you may be indemnified acting as an officer, director, shareholder, agent, or employee of the company if so stated in the articles of organization.

Well, we filed two extra pages with your articles in Nevada that say you shall be indemnified. So really quick, when you're forming an LLC, which I recommend for just about everything, I would have your name, we can list you as manager, member, or managing member. Well, the word member means owner. There is no reason for us to ever put ownership on public record.

So I always set the LLC up where you are simply the manager. So as a reminder, when you're entering into contracts and agreements, you personally would never enter into a contract or agreement with anybody. Your LLC does. That's what protects you. If a contractor agreement asks for initials, just initial with your initials.

If it asks for a signature, always sign your name, comma, and manager. Or your name, as manager of ABC Enterprises LLC. By doing that, we're taking advantage of these indemnification laws where you cannot be held personally liable for anything that happens with your business. This goes right back to, this is how you protect yourself using a corporate entity or a corporate structure.

So, the question always comes up, people say, well, Adam, how is Nevada law going to protect me in California, or New York, or anywhere else for that matter? There is a federal law called the Internal Affairs Doctrine. It is also echoed in every state law statute as well. It tells the courts very clearly, that the laws of the state of incorporation shall govern the internal affairs and liabilities of managers and members of LLCs.

So we organize under the laws of Nevada and we simply register you to do business in California or whatever state you're operating in. Now people always say well if we incorporate in Nevada We don't have to pay state income tax. That is a half-truth. There are no additional tax filings by being in Nevada but if you live in California It doesn't matter where you make money. You're going to pay California tax.

So there are some companies that move their headquarters to Nevada. We have a lot of people who warehouse out of Nevada because there is no state income tax. But you would physically have to have an office here, physically be operating here to take advantage of that benefit. You really should think about moving to Nevada. I just talked to a guy today. He moved from California to Reno. I said, how do you like being in Nevada? He said it is amazing. I'm saving so much money in taxes. And that is true, but he had to physically move to Reno to get that benefit. So something to think about.

I mentioned the Internal Affairs Doctrine. This is in every state law statute as well. Here's Washington State. The laws of the state of incorporation shall govern the internal affairs and liabilities. Same thing in California. California Unlimited Liability Company Act. Here's the same thing in Florida.

It tells the courts very clearly. The laws of the State of Incorporation shall govern the internal affairs and liabilities of managers and members of LLCs. So if you are operating out of Texas and you get involved in a lawsuit, we're going in front of a Texas judge. But the judge has two options, either he or she can apply Nevada law to the case, or they might recuse themselves and say, yeah, we don't want to deal with this Nevada stuff.

Go file the lawsuit in Nevada. Either way, we get those protections of Nevada, which is a really big deal. So, there's a really wise guy. It was Nelson Rockefeller, he said, the secret to success is to own nothing but control everything. And this is how we do it. Set up a company, list yourself on record as a manager, make sure it's formed properly, and make sure we're using the right corporate structure for the right investment.

Again, if you're going to go public, take your company public, we'll do a C corporation. Small business we do an LLC. Now I put together this little roadmap that you should take a picture of to get really familiar with this and this shows on here kind of an overall corporate structure. At the bottom, we have a revocable living trust.

If you don't have one, you need to get a family trust done. Again, a whole nother presentation on family trust, but to the top right, you'll notice that we have an LLC for rental properties. If you're just doing rental properties or you own rental properties, that needs to be in its own LLC. That LLC will be disregarded for tax purposes.

It does not file a separate return. Any profit or loss of your passive income flows through to your personal return 1040 Schedule E, exactly the same as if you did not have the LLC. Now, if you have a business, so for example, you're in real estate, you're doing wholesaling, rehabbing, you're a real estate agent, you're an Independent contractor.

I want that LLC shown on the top left to be taxed as an S corporation. So again, it's LLC. But we tax it as an S corporation to give you the best tax benefits. And I've got a whole nother training on taxes that we can cover, but this is the simplicity we get to choose, and working with a professional, we can help you to select the right tax election. There are also self-directed retirement accounts we could do, setting up self-directed solo 401k plans, and self-directed IRA plans, where we can now have checkbook control over the money you have. Instead of being invested in the stock market, we could invest in rental properties and commercial syndications.

Things that are outside the volatility of the stock market. So, there's a lot of options that open up. But it starts with, do what the wealthy people do. Incorporate in Nevada. So, if you want to go ahead and, in your chat box there, type whatever questions you have. I'm about out of time today, so we'll have to plan another event.

But make sure you put your questions in and I promise you I will get back to you, answer those questions, and we'll schedule some time. Use our Calendly link below and myself or one of my expert team members can talk to you about your situation, what you do, how you do it, and really just make sure that you're getting everything set up perfectly.

So thank you so much for tuning in today. I appreciate your time and look forward to talking to you. Thank you.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.