Using Legal Entities for Asset Protection - Printable Version

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Using Legal Entities for Asset Protection - it-man - 10-16-2015

Before getting into the meat of this article, I'll share a little about my background. I have spent over 20 years researching and using various types of legal entities. I have tried a number of different types of entities and studied many other types. For the last 17 years, I have used legal entities in my daily life. I am not an attorney and I am not giving anyone legal advice. I am only sharing what I have learned.

The United States is perhaps the most litigious country in the world. We have more lawyer per capita than any other country. Many of these lawyers are looking for work and many of them will take on a lawsuit on a contingency basis. This means that they only get paid if they win the lawsuit. Filing a lawsuit is one of the main methods people use to take assets away from you. It is not clear how long the current environment will continue to exist as Earth ascends. But as long as the current environment exists, using legal entities to protect assets is a good idea.

Legal entities (for the rest of this article I'll just call them entities) have been used by the wealthy for hundreds of years to preserve, manage and pass on their assets. Here are a few reasons people use entities:
  • Privacy. By placing assets into various entities, it is hard for people to discover what you own or control. Privacy is your first line of defense for asset protection. If a lawyer can't find that you own any assets, he is far less likely to sue you on a contingency basis.
  • Control vs. ownership. This idea can be stated as “own nothing and control everything”.You do not have to own an asset to enjoy its benefits. When an asset is owned by an entity and you control the entity, you can enjoy the benefits of the asset without owning it. If you own it, you can be sued and you can loose the asset if you loose the law suite.
  • Hold assets. Assets can be separated across many entities – one entity per major high liability asset (land, vehicles, etc.). Another way of stating this principle is, "don't keep all your eggs in one basket". By following this principle, if any one entity comes under legal attack, the only assets that can be lost are the assets held by that entity.
  • Limit personal liability. Every entity is considered to be a “judicial person” in the eyes of the law. You personally are not held liable/responsible for what the entity does and the entity is not held liable for what you do. So if someone sues and entity, you are not responsible for any damages.
  • Tax advantages. Entities can take deductions and thereby reduce the overall tax burden. In some cases, entities can be used to legally and lawfully reduce or eliminiate taxes.
  • Estate planning. Entities can be used to pass on assets to your heirs without probate and death taxes.
I have already mentioned the term “judicial person” but what is a “judicial person”? The law and courts treat a “judicial person” or entity the same a “natural person”. An entity is separate from you, the owner or manager. Black's Law Dictionary defines a judicial person as “Entity, as a firm, that is not a single natural person, a human being, authorized by law with duties and rights, recognized as a legal authority having a distinct identity, a legal personality. Also known as artificial person, juridical entity, juristic person, or legal person. Also refer to body corporate.” So, an entity you create is separate from you.

You might wonder what an entity can do. In short, an entity can do almost anything a natural person can do. It can own and operate a business, open bank accounts (checking, savings, with debit cards), make loans or take out loans, own assets (vehicles, real property, precious metals, currency, collectables), open a brokerage account and engage in passive investing, do charitable giving, etc. If you properly structure your life with entities, you can conduct all of your affairs using entities rather than doing so in your own name.

There are many types of entities that one could use to protect assets. Here are a few that you might be familiar with.
  • Trusts – contract trusts or dozens of types of statutory trusts
  • Corporations – C corporation and S corporation
  • Limited Liability Companies (LLC)
  • Non-profit Corporations
  • Foundations
  • International Business Company (IBC)
  • Partnerships, Limited Liability Partnerships, and many more
My earliest experiences with entities was C and S corporations. C corporations have existed since the 1600s. They are commonly used to operate medium to very large businesses especially when the company want to allow their stock to be publicly traded. C corporations have owners (called shareholders), a board of directors, managers and employees. They pay taxes on their profits and can take deductions to reduce their tax burden. C corporations do experience double taxation because the corporation pays taxes on its profits and the dividends it pays to the shareholders are also taxed. Many large companies have gotten so good at using deductions that they pay no taxes. From my perspective, a C corporation is most useful when you want the stock to be publicly traded or if there will be lots of owners. C corporations can be expensive to create and they can be complex to run.

S Corporations were first created in 1958. They are typically used by smaller businesses. Like a C corporation, they have owners (shareholders), a board, managers and employees. They have stock but it is not publicly traded. From a taxing perspective, S corporations are usually treated as a partnership and the profits flow through to the owners and the owners pay taxes. So S corporations do not have the double taxation that exists for a C corporations. From my perspective, I would use an LLC rather than an S corporation.

A trust is a three party contract between a settler/creator, one or more trustees, and one or more beneficiaries. The settler/creator is the person who creates the trust and puts the initial assets into the trust. The trustee runs the affairs of the trust – opens bank accounts, keep minutes, writes checks, makes investment decisions, etc. The beneficiary is the one how receive the benefits of the trust. Trusts have existed since the 1200s. Trusts can be divided into two broad categories: statutory and contract. There are many different types of statutory trusts. They are authorized by the statutes in the various states. You should consult an expert in trusts if you are interested in this type of trust. The right to create a contract trust comes from the US Constitution which guarantees our unlimited right to contract. From my perspective, the biggest drawback on trusts is that according to long standing trust law, you can't hold all three positions in a trust (settler/creator, trustee, and beneficiary). In most cases you would be the one who created the trust and you want to be the beneficiary. This means someone else has to act as the trustee. Many people have lost their fortunes when a trustee disappeared with all the money.

LLCs were first authorized in Wyoming in 1982. So an LLC is one of the youngest types of entities. LLCs are now accepted in all 50 states. LLCs have one or more members rather than owners, and they have units rather than shares. LLCs are run by one or more managers which can either be the member(s) or someone appointed by the member(s). LLCs can have employees or not, as needed. LLCs are easy and inexpensive to set up and run. In most cases, an LLC is treated like a partnership which means it is a pass-thru where the profits and tax liability flow to the member(s). The IRS treats single member LLC as a “disregarded entity” which means that the LLC does not have to file a tax return but the member files the tax return and claims any profits that may exist. In some states, you can set up an LLC for as little as $150.

Non-profit corporations can be created and are most often used for charitable purposes. There are two common ways to set up an non-profit. The most common method is to form a regular C corporation and apply to the IRS for tax exempt status under section 501©(3) of the Internal Revenue Code. The second, method is to create an non-profit in certain states and then operate under section 508 of the Internal Revenue Code which recognizes an exclusion for certain types of organization. This second type of non-profit is rather unique. From this point forward, this is the only type of non-profit that will be discussed and it will be called an NPC. The NPC has no owner but does have a head officer who controls everything. This head officer can be called a variety of names such as president, director, overseer. This type of NPC has existed for about 400 years. There is some evidence that the British monarchy (head officer is called the “Crown”) uses this type of entity. The Catholic Church commonly uses the NPC for their Bishops. The reason this type of NPC can exist is because of the First Amendment to the US Constitution which guarantee of religious freedom. At last count, there were 15 states where this type of NPC can be created. It is a common practice for this type of non-profit to pay the personal expenses of the head office holder. It costs about $150 to $250 set up an NPC.

Many people may want to keep their life simple after the Global Currency Reset (GCR). In my opinion, your life will become more complicated when you have significant assets. You will need to know more and take on some new tools to effectively run you affairs. The area of creating and using entities is one major area of your life where you will need to learn and grow. Many people might be tempted to just hire a lawyer to set up the legal entities they believe they will need. But I have seen this strategy backfire on people. You will not be able to have an intelligent conversation with a lawyer about your needs unless you have a fairly good understand of various types of entities, and the advantages/disadvantages of each type. I have seen people completely rely upon a lawyer to create an LLC only to find out that it did not meet the their needs the way it was set up. Most people think lawyers perform some sort of magic. But when you analyze what a lawyer does, you realize that all they do is sell words. With some study and work on your part, you can set up entities yourself or at least understand the entities well enough that you can make sure the lawyer sets them up properly to meet you needs. 

In the rest of this article, I will be discussing two types of entities: LLC and NPC. I won't tell you how to create these entities in this article but I will continue to give you background information. At the end of the article, I'll give some links that will provide the details on how to create the LLC and NPC yourself at a very low cost. If you don't want to set up these entities yourself, at least you will be better able to talk to a lawyer about what you want. I should also mention that there are very few lawyers that know how to create the NPC that is being discussed here.

The assumption I am making is that most of the future activities you might want to engage in can be managed by using LLCs and NPCs. The LLCs can be used to hold assets (land, vehicles, etc), do investing and operate a business. The NPC can be used for charitable giving and to own the LLCs. If you plan to operate a very large business, you might need something other than an LLC or NPC. If this is the case, seek experienced legal and financial advice. 

Entities are created within a legal jurisdiction. In the US, each state has separate legal jurisdiction for the purposes of creating entities. Each state has its own rules (statutes) for creating entities. To create an LLC, I have found that New Mexico and Missouri have very good statutes. Both states provide excellent privacy, low setup cost and do not require any annual filings to maintain the entity. New Mexico does not allow you to create the LLC online but Missouri does offer this service. You can create an LLC in Missouri in under 30 minutes. To create an NPC, I have found that the statutes in Arizona to be very favorable. Arizona does not offer online creation. Arizona does offer online name reservation and annual report filings.

Picking the best jurisdiction where the entity is created depends upon the purpose for the entity. If you are going to operate a business within a single state using an LLC, I would suggest that you create the LLC in the state where the business will operate. If you are going to operate a business in multiple states, seek legal advice on the type of entity and the best state in which it should be formed.

If you need an entity to hold assets, you should be safe using an LLC in Missouri. This is a special case because the LLC can be thought of as a holding company. Most states have statutes that define the requirements to register an entity in their state. In most cases, if the entity is “doing business” in the state, it must register in the state (either be formed in the state or register as a “foreign” entity). These statutes list what is not included as doing business. Here is a list of some (not all) of the activities that are excluded from “doing business”: (1) holding meetings of its directors or shareholders, (2) maintaining bank accounts, (3) maintaining offices or agencies for the transfer, exchange, and registration of securities, (4) voting the stock of any corporation which it has lawfully acquired, (5) effecting sales through independent contractors, (6) creating as borrower or lender, or acquiring, indebtedness or mortgages or other security interests in real or personal property, (7) transacting any business in interstate commerce. It would be a good idea to look up how your state defines “doing business”. You can see from this list, that if your entity is a holding company, the activities is likely to do will not quality as “doing business” in your state.

In general, you must keep your business affairs separate from your personal affairs. Businesses do not normally pay personal expenses. If you violate this rule and are ever sued or audited, it can result in some real problems that may cause a financial setback. A court can rule that business is an alter ego of you. This is sometimes called piercing the corporate veil. On the other hand, businesses can pay the expenses associated with running the business. For example, if a company owns a car the company can pay for the insurance and maintenance costs. These expenses reduce the tax liability of the business. This is by no means all you need to know about this concept. If you create one or more entities, you will need to thoroughly understand this concept.

I highly recommend having a private mail box to act as the business address for your entities. This will greatly enhance your privacy. Good places to look for private mail boxes are UPS and Pack & Ship type stores. Shop around in your area because there can be a significant difference in price from one place to the next. One big reason I suggest using a private mail box is because you must have a street address to get a tax ID number from the IRS (the IRS won't accept a PO box). It is best to rent the private mail box before you create the entities. You can use the same private mail box for multiple entities.

If you form an entity in a state where you do not reside, you will need to have a registered agent in the state where the entity is formed. A registered agent is listed as the contact person for the entity. If anyone needs to provide legal service (notify that a lawsuit has been filed), it is sent to the registered agent who in turn forwards it to you. The registered agent charges an annual fee for their service. A common fee is about $100 per year. I like Incorp Service, Inc. (https://www.incorp.com) because they provide services in every state.

Here is a summary of the steps required to create an LLC in Missouri:
  • Check the Missouri state website to find a name that is not already used. The name should be nondescript (it should not contain your name or the names of any of your family members). Nondescript names would be something like Eagle Holdings LLC, Mammoth Holdings LLC, Excursion LLC, XYZ LLC. It normally takes less than 30 minutes to find a unique name that is not already being used.
  • Using the Incorp Services' website, order registered agent service for the LLC in Missouri. The first time you use Incorp Services, you will create an account with them. You will use this account to pay your annual service fee for an entity and to set up each new entity. It takes less than 20 minutes to register with Incorp Services.
  • Using the Missouri state website, file the LLC which will create Articles of Organization and a Certificate of Organization. Save a copy of these documents for your records. It takes less than 20 minutes to create the LLC.
  • Create an Operating Agreement based upon a template using a word processor. It will take less than an hour to customize the template with the information for your LLC.
  • If a bank account is needed, get an employer ID number (EIN) from the IRS.
Here is a summary of the steps required to create an NPC in Arizona:
  • Check the Arizona state website to find a name that is not used. The name should be nondescript. See suggestions on nondescript names above. You may want to reserve the name you want to use since it can take several weeks to get the NPC registered.
  • Using the Incorp Services' website, order registered agent service for the NPC in Arizona.
  • Get a Statutory Agent form from Arizona and fill it out. Scan the form and email it to Incorp Service so they can sign it. Incorp Services will email the signed form back to you. This form will be part of package you will mail to Arizona. This process can take a day or two.
  • Create an Articles of Incorporation based upon a template using a word processor. You will need the registered agent address that Incorp Services will provided. This process takes about an hour.
  • Fill out the Arizona Cover Sheet for your filing request. This takes less than 30 minutes.
  • Fill out the Arizona Certificate of Disclosure form. This takes less than 30 minutes.
  • Mail all the forms to Arizona along with payment. Wait for forms to be filed. The amount of time this takes depends upon how much you are willing to pay. Arizona offers an expedited service which takes about a week and normal service that takes about a month.
  • Arizona requires that you publish the existence of your NPC in a newspaper of record. This takes about 3 to 4 weeks. When the newspaper is finished with the required publishing, Arizona will be notified and then your registration process will be completed.
  • If a bank account is needed, get an employer ID number (EIN) from the IRS.
  • Arizona requires that the NPC file an annual report in order to remain in good standing. This can be done online in under 30 minutes. The annual report verifies the contact information for the responsible parties for the NPC.
If you need to open a bank account for your entity, you will need to get an EIN from the IRS. An entity that just owns other companies wouldn't need an EIN or a bank account. The first time you create an entity, you will have to give your SSN as the owner or responsible person on the EIN application. The IRS has a form to change the responsible person later if you so choose. Once you have one entity with an EIN, you can use that entity's EIN to get an EIN for other entities it owns and this enhances your privacy. If you are planning on creating an NPC and an LLC, I would suggest getting an EIN for an NPC first and then use the NPC's EIN as the responsible person when applying for the EIN for the LLC. There are several methods that can be used to submit an EIN application: online which takes less than 30 minutes, via fax which takes about a week and via US mail which takes 4 to 6 weeks.

Any entity you create that will handle money will need a bank account. You can use a local, regional or nationwide banks. If you are opening an account for an entity that was created in another state, you may find it easier to use a regional or nationwide bank. Banks that operate in only one state may be reluctant to open a bank account for an entity created in another state unless you take the extra step of cross registering the entity in the state where you reside. In some cases, you will loose a lot of your privacy if you cross register the entity in the state where you reside. If one bank refuses to open an account, go to another bank or even another branch for the same bank. To open an account for an LLC, you will need to show the banker the Operating Agreement, Certificate of Organization from Missouri and the EIN. To open an account for an NPC, you will need to show the banker the Articles of Organization, Certificate of Good Standing from Arizona and the EIN.

It is customary for entities to hold meetings and to record the decisions that are made in the meeting on minutes. Meetings and minutes should be created at least yearly for each entity. Special meetings can be called to when important decisions need to be made before the next annual meeting. The meeting minutes demonstrate to any outside party that the entity is being operated as a separate “person” from you, not an alter ego. Some sample minutes are provided for the LLC and NPC on the web pages shown below.

The details of how to create an LLC and an NPC are too lengthy to include in this article. I have created a web based page where I have posted the full details needed to create an LLC in Missouri. Click here  to see all the details. This page doesn't tell you everything you need to know to operate the LLC over the long term, so you will need to do some additional study on your own. I suggest the book Limited Liability Companies For Dummies” by Jennifer Reuting. The web page has some audio files that provide more information on using LLCs. After displaying the web page, download all of the files and study each file. The web page has a "Read Me First" text file that contains an explanation of each file on the page. The files include the template for the Operating Agreement and sample minutes.

I have created another web based page where I have posted the full details needed to create an NPC in Arizona. Click here to see all the details. The page has some audio files that teaches more about the NPC. The web page explains some very attractive tax advantages that this entity possesses. This page tells you everything you need to know to operate it over the long term. After displaying the web page, download all of the files and study each file. The web page has a "Read Me" text file that contains an explanation of each file on the page. The files include the temple for the Articles of Organization and sample minutes.

I hope you find this information helpful.