3 Ways to Blow Your Corporate Asset Protection

Incorporating your business should give you asset protection, at least from the debts of the company. But there are ways to blow that protection. Smart attorneys know this, and will look for evidence of you making a mistake. Don’t make these simple mistakes and sabotage your asset protection strategy!

Mistake #1: Comingling Funds

When you incorporate a business one of the very first things you need to do is get that business a separate Federal Tax Identification Number (also called an Employer Identification Number or EIN). As soon as you have that number, your next stop should be your local bank, to establish a separate business account.

An incorporated business is legally separate from you. But, you have to prove that separation. One of the ways to do that is to make sure that all income and expenses for the company go through the company’s bank account. Do NOT get into the habit of depositing company money into your personal account, or paying your personal bills from the company’s bank account. Do NOT use your company bankcard like your own, and pull cash from an ATM.

When you do these things, you are guilty of something called co-mingling. That’s one of the most common ways attorneys break through legal corporate asset protection. If they can show you have a pattern of co-mingling, they can make the argument that your business isn’t really a separate legal entity at all. Instead it’s something called an ‘alter-ego’ – in other words, it’s really you, personally, but using a different name.

Mistake #2: Signing Agreements Personally

Pop Quiz: You’re looking for new office space. You find a space that looks good, and accept the Landlord’s terms. He draws up the contract and you get ready to sign. When you’re reading the contract through, you notice that it’s between his company and you personally, even though the space you’re renting is for your business. Do you:

(a) Sign the contract as it stands; or
(b) Insist that the Landlord revise the contract to clearly state that it is between your company and his company.

Hint: There’s only one good answer here.

When you’re out in the world on company business, it’s absolutely VITAL that everyone you deal with clearly understand that you are representing the company, and are not contracting with them personally. Otherwise, what you’re doing is blowing a hole in your asset protection strategy. When you sign things personally, like the rental agreement, you are effectively bypassing all of your corporate protection. The office may be for your company, but the responsibility for paying the rent belongs to the tenant. And, by allowing the contract to stand with your name on it, and not your company’s name, you’ve made yourself the tenant. Now, if you need to get out of that lease, you’ll be on the hook personally for any missed payments.

Mistake #3: Not Moving Assets Over

I set up a lot of LLCs for real estate investors, who are looking for ways to protect their real estate properties. Yet I’m surprised at the number of investors who go to the time and expense of setting up their LLCs, but stop short of actually retitling their investment properties into the name of the business.

In some cases it’s understandable. There are several states who don’t seem to care much for people protecting their assets. Even though the true beneficial ownership of the property isn’t changing – it’s just moving from your name into an LLC that you’re the 100% owner of – it doesn’t matter. These states say it’s a taxable transfer and hit you up for the full amount of transfer taxes, which can be thousands of dollars. Oh they might let you move the properties into a revocable living trust, but that only provides estate planning. Revocable trusts don’t necessarily give you any asset protection.

So, some investors prepare the deeds moving property into the LLC’s name have the deeds notarized, and then store those notarized documents away, thinking everything is fine. But the problem with that approach is proving the transfer really took place. You’re going to have an official public record saying that you own a property personally, and an unrecorded (notarized) deed that says your LLC owns the property. When a Court is asked to determine who owns it, the official record is going to be given a lot of weight over your unofficial document. And, when is this going to be a problem? Probably right around the time your next-door-neighbor is threatening to sue you, because a tree on your property came down in a windstorm, and landed on his roof. At that point it’s too late to move your assets around.

If you’re a real estate investor, the best time to get your investment properties into your LLC is at purchase. Whenever possible, take title to the property in the name of your LLC, rather than personally.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

Related posts:

Leave a Reply