No Money for a Business Structure? Maybe Rethink Your Business Plan!

I don’t want to sound like an alarmist, but this is the United States of America, perhaps the most litigious country on the planet. If you’re in business in the U.S. and have anything worth keeping, protect yourself. The bigger your business gets, the more likely it is that someone, some day, will try to take a run at you in court.

The following is a true story taken from a live event:

A woman stood up at the microphone and told her story. She had started a business, but she didn’t have enough money to spare to also create a formal business structure to operate through. Even though she was warned that she was exposing herself to liability, her accountant had told her she wasn’t making enough money to make the business structure economic, and she should wait.

About 6 weeks after starting her business, things were not going well with the business. In fact, someone was threatening her with a lawsuit. Now she wanted to see if we could help her to start a business structure.

But it was too late. Once there’s a threat of a lawsuit – even if it’s just a threat – the damage is done. It’s what is in place at the time the cause of action arises that counts. And, in this place, there was nothing more a trade name. The woman was going to be on the hook for any damages assessed against her business.

This is something we’ve seen far too often. For example, we see people create business structures to hold real estate investments, and then balk at paying extra transfer taxes, or just forget to transfer their real estate into the LLC. The property stays in the person’s name, until all of sudden there’s a problem on the property. Now we get a frantic call, saying, “I’ve got to move the property out of my name”, but again, its too late. If we make the change now, one of the first thing a plaintiff’s attorney is going to do is demand that we move that asset back. They’ll probably also claim that our client has performed something called a fraudulent conveyance, and ask for a financial penalty, in addition to returning the property to his or her individual name.

If you’re looking at a business structure, either for an ongoing business or to hold real estate investments, do your research ahead of time. Find out all of your costs, and then factor that into your decision-making process.

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.

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