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Creating a 'holding company' to shield assets
Old 12-15-2010, 04:22 PM   #1
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Creating a 'holding company' to shield assets

Lets say I own a biz that has high potential for lawsuits (I do). Lets say this company has a lot of assets that could be attached in the event of a lawsuit (I do).

Now, lets say I were to incorporate a separate entity that would buy and own all major assets Biz # 1 needs, and lease them to biz #1.

In the event that biz #1 gets sued and insurance doesnt cover all of the damages, it seems that the entity suing would not be able to go after biz #2's assets...and sinces biz #1 really has no assets, their risk is greatly mitigated.


Just a brainstorm...
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Old 12-15-2010, 05:19 PM   #2
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I am not a lawyer, nor do I play one on TV. The real interesting question is whether a plaintiff's attorney could pierce the corporate veil here or otherwise get a judge to declare such an arrangement as a sham. Presumably legal counsel could tell you what is necessary to avoid same.
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Old 12-15-2010, 05:36 PM   #3
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If you had any influence on Biz #1 actions or Biz #2 actions, you'll be included in any suit. Corp veil will easily fall. One possible avoidance is if you are asset free and reside in a non-community property state. Think of a doctor with a corp where he owns nothing. Then he get sued and after loosing declares bankruptcy.
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Old 12-15-2010, 05:45 PM   #4
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AFAIK this is a legitimate and common business risk management strategy. I plan to use it myself when I RE. Consult with legal eagles in your jurisdiction.
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Old 12-15-2010, 06:28 PM   #5
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AFAIK this is a legitimate and common business risk management strategy. I plan to use it myself when I RE. Consult with legal eagles in your jurisdiction.
I am also curious how these things are set up. If one of our lawyers would care to comment I'd be interested.

I do think that even if these schemes are not fool/judgement proof simply having them can act as deterrent to legal action. Similar to this is house protected by the XYZ alarm system.

I remember when my parents got taken by slick real estate couple back in the late 70s with some creative financing stuff. We talked to the couple and as soon as we mentioned possible legal action. He immediately launched into a speech about how he was judgment proof because he a shell corporation and the assets were owned by the kids blah blah.

I have no idea if he was blowing smoke, but it certainly stopped my parents from perusing legal action.
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Old 12-15-2010, 09:13 PM   #6
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Combine these two items.

Preparedness.




Gun Safe.



Stack excess cash inside. Make sure to have an appropriate fire rating. Problem solved.

-CC
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Old 12-15-2010, 09:52 PM   #7
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Rather than forming and maintaining biz #2, it might be simpler/cheaper just to increase your liability insurance.
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Old 12-15-2010, 11:14 PM   #8
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Rather than forming and maintaining biz #2, it might be simpler/cheaper just to increase your liability insurance.
certainly, but i was brainstorming and became curious
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Old 12-15-2010, 11:35 PM   #9
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Rather than forming and maintaining biz #2, it might be simpler/cheaper just to increase your liability insurance.
Ya what is the fun of that . Geeze next you'll be telling people to take social security at age 66, rather than pay it back and reset it at 70. Suggest that we use the standard deduction, invest in index funds, and even pay list prices.



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Old 12-16-2010, 12:56 AM   #10
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With your shell game example, realize that in some scenarios of incidents (such as a serious car accident), they could go after both the operator/leasee of the equipment (Biz #1) as well as the owner of the equipment (Biz #2) anyway, so both companies could still have potential legal exposure.

Another opportunity would be to simply form a Limited Liability Company (LLC). It allows you to have a hybrid entity that limits your liability to the company, while also helping shield some assets. It's also (relatively) easier to file your taxes as a sole proprietor LLC, if that applies in your case, compared to a corporation/S-corp.

However, when it comes to negligence, all bets are off for LLCs protecting you (same with some/most liability insurance carriers), as (I believe) your protection ends if they can prove willful negligence or fraud/other illegal intent.

Also, in order to get insurance, your carrier could possibly charge you more for Biz #1's insurance if it's an empty shell with no assets. Even if they don't, as one person pointed out, it would be cheaper to simply up the umbrella coverage than get insurance on two businesses and the associated quarterly/annual tax headaches.
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Old 12-16-2010, 10:23 AM   #11
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*** I am not an expert - this is just an idea I just had ***
Can you segment your businesses? For example if you rent out inflatable slides & ferris wheels, have one company own the slides & another the ferris wheel. Then a 3rd company that leases the equipment & provides the service. So, if the problem is with the slide, the ferris wheel company is safe.
*** again, check with a lawyer ***
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Old 12-16-2010, 12:38 PM   #12
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Quote:
Originally Posted by thefed View Post
Lets say I own a biz that has high potential for lawsuits (I do). Lets say this company has a lot of assets that could be attached in the event of a lawsuit (I do).

Now, lets say I were to incorporate a separate entity that would buy and own all major assets Biz # 1 needs, and lease them to biz #1.

In the event that biz #1 gets sued and insurance doesnt cover all of the damages, it seems that the entity suing would not be able to go after biz #2's assets...and sinces biz #1 really has no assets, their risk is greatly mitigated.


Just a brainstorm...
Shooting from the hip at your situation the easiest way to pierce the corporate veil (this includes all limited liability entities not just corps) is to claim that biz#1 is under capitalized for its type of business, size, market conditions, etc. The determination of whether a business is under capitalized is highly fact specific, depends on the industry and depends on the applicable jurisdiction's laws.

Another easy way is if the liability generated in biz #1 is personal services. If you perform personal services that result in liability, all your assets are at risk (including your ownership interests in other businesses). You generally can't daisy chain limited liability entities for any protection when you actually perform services. This may work with liability such as environmental contamination on real property, etc.

There is a measure of protection in that you might discourage would be plaintiffs from going after you because they think that the limited liability entity prevents them from getting your assets. I would never rely on this for anything, but it is common enough to be considered.

Insurance is often a better way to manage this type of risk. The bottom line is that you should discuss this with an attorney who practices in your specific area.

These are just my general opinions not specific advice for you.
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Old 12-16-2010, 05:38 PM   #13
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Quote:
Originally Posted by thefed View Post
Lets say I own a biz that has high potential for lawsuits (I do). Lets say this company has a lot of assets that could be attached in the event of a lawsuit (I do).

Now, lets say I were to incorporate a separate entity that would buy and own all major assets Biz # 1 needs, and lease them to biz #1.

In the event that biz #1 gets sued and insurance doesnt cover all of the damages, it seems that the entity suing would not be able to go after biz #2's assets...and sinces biz #1 really has no assets, their risk is greatly mitigated.


Just a brainstorm...
Understand if I sue you, I will get all your bizs.
Meaning if its determine that you were a responsible party, all the corps won't help you. Now if an employee is the cause, then it can help you.
If biz 2 only leases assets to biz 1, I'm pretty sure a good lawyer can show that its not a valid biz and thus break the wall of protection.
BTW, if just needing liability protection, you want a LLC.
TJ
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Old 12-16-2010, 07:05 PM   #14
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Having done the S corp thing for roughly 15 years ... need to keep in the mind the costs of "playing office". A CPA will charge ~1200/yr for the corporate tax return and annual state filing fees run ~600/yr (in MA). Double this if you want to "play office" with two corporations.

Liability insurance is a whole lot cheaper.
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