Nevada Corporation Strategies

Organize the Business Structure That Is Right for Your Opportunity

Every business requires a structure that will withstand necessary legal and governmental scrutiny. The choice of how to organize a new enterprise should be made based on the needs and capacity of the owner(s) to maintain and detail the records, history and finances of the business.

Many simple service businesses are set up as a sole proprietorship. The lawn service I utilize is a sole proprietorship. I make out the check in the name of the person providing the service. If I do not spend over $600 per year with any sole proprietor I am not required to fill out tax form 1099 and provide the information to the Internal Revenue Service and the service provider.

The sole proprietorship is the method of structuring most entrepreneurs utilize when starting out in a small-scale commercial venture. This works if services provided are simple, of relatively small transaction size, small inventory required and there is no need for hiring and paying employees. As sales grow and the need to expand becomes apparent the entrepreneur will probably want to consider a more formidable structure.

Here is my advice when considering the business structure best suited for your business, based on present and future needs: consult an attorney. Taxes, investment vehicles, partnering, harvesting profits, incorporation options, and depreciation or only a few of the areas of concern a new business may need to consider and decide upon. A business attorney will have expertise in every area of concern and can construct the most appropriate structure for your business and personal needs. The ability to memorialize in precise legal documents the exact terms, conditions, and responsibilities of all officers and/or share holders in the company is invaluable when disagreements occur.

The importance of written agreements and contracts, signed by all parties to the transaction, cannot be overstated. No one ever enters into a business situation if they are 100% sure it will fail. There is always an air of confident expectation that the business has a good chance of success and will ultimately prosper. Unfortunately, there is always a significant chance that results will be disappointing and disagreements will occur. Make sure that all parties to a deal have a full awareness of the business structure they are participating in.

Oral contracts and agreements have been upheld in courts. However, they are much more difficult to enforce than properly written and executed business contracts. Do not leave important details to chance. Have proper documentation on hand for the protection of all parties.

Partnerships, limited partnerships, limited liability corporations, and corporations are popular vehicles for housing the legal structure of a business. Each has benefits and liabilities, depending on the needs and requirements of the business owner(s).

A partnership can be useful when several parties bring complimentary assets to a venture. One partner might have a patent that represents a commercial opportunity. Another might have investment resources they can bring to bear. Yet another potential partner has specific management experience to contribute. 

I have entered into several partnerships in the past with mixed results. If there is a bit of advice I can offer to potential partners before they start it is this: have full agreement on how to harvest profit/loss when success/failure occurs. One partner wants to grow and mature a business, while another wishes to cash out after a few years and this is where the seeds of destruction are sown. Goals, as well as duties and responsibilities must be fully transparent.

The Limited Partnership can be an excellent opportunity for the entrepreneur wishing to put capital to work, but not physically committing to work on a project. Typically a General Partner will manage the business, and the Limited Partners provide the pool of money required in funding a business. Usually units of a Limited Partnership are sold in equal dollar amounts. Be sure and read the deal prospectus carefully and skeptically. In addition, be sure to familiarize yourself with the laws of the state where the business entity will be domiciled as the various states have different laws in this area.

A Limited Liability Corporation is a relatively new corporate structure that offers many of the advantages of the corporation and the benefits of individual tax rates. An attorney will be able to advise if the Limited Liability Corporation is appropriate for your particular needs.

A Corporation is the vehicle that requires the most care and maintenance, as well as providing maximum personal protection. A Corporation is ostensibly a legal entity that acts as if it were a person. Losses are incurred by the legal entity of the Corporation, not by the shareholders of the Corporation. Assets of an incorporated business are property of the Corporation, not the individual shareholders. The owners of stock in the Corporation enjoy benefits based on the number and class status of their shares. 

An attorney can advise the best state in which to incorporate based on your anticipated needs. Nevada is the best state for secrecy. Delaware is excellent for transparency and resolution of disputes. Some states are more business friendly from a tax and regulation standpoint and all of these areas must be considered before filing for incorporation.

A Corporation will need to be assigned a Federal Identification Number in order to open a bank account at any financial institution in the United States. The Federal Government utilizes this number when tracking tax, financial and employment data on every incorporated business.

The Articles of Incorporation, annual meeting minutes, a board of directors, corporate fees and filings, state compliance and filing local, state and federal tax returns require a detailed, and potentially costly execution of corporate governance. In addition, stock certificates must be appropriately accounted for and capitalization requirements met and maintained.

Be realistic when choosing the business structure that will offer your fledgling enterprise the most useful features based on present and future needs. Many people file for incorporation, then realize they do not need the hassle of maintaining detailed books and records. Use the business structure that enables you to legally perform every obligation required, while allowing you to be a slave to your business opportunity, not a slave to your corporate structure.

Asset Protection in the USA

Introduction – When we surf through the web we see many entities selling American Trusts, Corporations and other structures that they consider to be asset protection strategies. These run the gamut of corporations in the states of Wyoming, Delaware or Nevada, trusts of various types in different jurisdictions and other structures all based in the USA.

What is wrong here is that nothing in the USA can protect you from an aggressive judge who feels your assets should be seized to satisfy some sort of debt or perceived debt. You are subject to the mercy of any Judge who may or may not be following the law. Now if the Judge over steps his bounds you are faced with paying massive legal bills to correct the situation in the appeals process. Your odds of winning an appeal are probably under 1%. Ask some of these law firms that do these asset protection structures what their rate per hour is going to be to try and protect your assets if they come under attack from a financial enemy of yours. Figure on rates starting at $325.00 per hour (very low) and going up to $1250.00 per hour for a partner in a top–drawer law firm in the USA. Ouch.

So the point is judges do not always follow the law in this country therefore no asset protection structure is going to be very protective. Litigation in the USA is too prevalent and expensive to allow one to comfortably use this jurisdiction for asset protection. The legal expenses of defending the asset protection structure can wipe out your assets. If you locate your assets offshore the odds of ever having to defend them against a financial adversary are miniscule.

USA Private Detectives – Now we can talk about private detectives in America getting bank information, credit card information, phone records etc. Go look at the ads on the Internet and call these private detectives up, they even take credit cards. The credit card fraud perpetrators use these people to get dossiers on potential victims they are going to fleece through an identity theft scam, and they even use stolen credit cards to pay for the files for their next victims. They will get your bank statements, cell phone statements and bills, phone bills and records, credit reports, driving records, public records – just about anything you wish to pay for. Big law firms have retainer relationships with private detectives.

We can also go on to discuss identity theft from security violations perpetrated by private detectives concerning bank accounts, credit cards, public records. If you vest your Panama real estate in the name of an anonymous bearer share corporation how could that possibly help someone do an identity theft on you? If your bank accounts were covered by bank secrecy laws wouldn’t that help insulate you from identity theft? If your credit card came from a bank under bank secrecy laws wouldn’t that help protect you? Panama is a much safer place legally and practically.

Confiscation of Funds and Assets – Next problem is civil court ordered pre–trial confiscation of funds. This can happen in a civil matter such as divorce. Remember any judge on a Federal, State, County or City level can pretty much get at any asset located anywhere in the USA. Usually this is a temporary hold or confiscation pending some court date but could be permanent in theory and/or practice. They usually refer to these actions as liens, levies, seizures, garnishments, attachments, and even injunctive relief. The terms vary with the jurisdiction. In the USA some government agencies can confiscate funds without taking you to court, thus no trial, no being judged guilty by a court of your peers, no due process, no trial by judge etc.

There are other government agencies that would need to get a court order to confiscate your funds in a civil matter and other assets but the courts tend to listen hard to these agencies and usually give them what they want which is going to be your assets. There are no really anonymous corporations in the USA. There is no bank secrecy or privacy at all. There is really no secure way to protect your assets from confiscation from any judge for any reason the judge deems lawful in his or her opinion as a jurist. Sure you might be able to go to court later on after the confiscation and convince a judge to return all or some of your assets but with what funds are you going to pay for your legal defense since your bank accounts, real estate etc is now all frozen.

Now you have to convince a lawyer to take your case hoping he can get the judge to allow your money to be used to pay for your legal defense. These lawyers that want to confiscate your funds without you even getting to give any testimony don’t even want you to be able to pay for your defense. They will argue that they are so sure of winning it is a waste of money to let you use the funds to pay for a high–powered law firm. How can there be asset protection in this legal environment? The ONLY way to accomplish asset protection where the USA is concerned is to liquidate the assets and move the funds offshore where the money is placed in a corporate or foundation bank account, stock brokerage account or into real estate in Panama.

USA Civil Lawyers Methods – Let me explain what an Ex–Parte proceeding is to start off. It is a legal proceeding where one of the other parties is not present and probably does not even know such a proceeding is taking place, usually the defendant. Let us assume you “feel” you have a good case in a court of law against a person or corporation. You hire a reputable law firm and prepare a complaint with whatever evidence you may or may not have. Next you file a complaint but do not serve the complaint and at the same time file an emergency motion with the court for an Ex Parte hearing in the Judges chambers in private, before the other party even knows you are suing them. You basically tell the Judge that you feel you have an excellent chance of winning and you are most concerned that the defendant will attempt to flee with their assets when the lawsuit commences thus causing you irreparable harm in that the money damages you suffered will then never be recoverable from this alleged culprit who has never had a chance to say one word in his or her defense so far. You then ask the court to freeze the defendant’s bank accounts, real estate and other property of the defendant so the defendant cannot flee with the assets thus allowing you to recover your debt when the court rules in your favor, which you are so very sure, they will do. You of course post a bond to cover any damages in case you lose. This plays much better when you are using a large politically active law firm. Now it is going to be an unlikely event that you lose since your adversary now has all his money frozen so how is he or she going to pay for an adequate legal defense.

Essentially the victim (defendant) is suffering as if he were broke, all before he had a trial in court, and in this case even before he knew anyone is even suing him let alone having been convicted by a jury of his peers. Imagine you wake up one morning find all your bank accounts, stock brokerage accounts, and real estate all frozen by a court as a result of an ex–parte motion. Your cars, boats, planes have been towed away by the sheriff, all based on the allegations of some large rich corporation or plaintiff claiming you did something to them in a secret tribunal with the judge.

Secret tribunals are a very bad thing for asset protection. If the defendant argues that he needs the money for defense the plaintiff argues that it is going to be a waste of time and money to let the defendant blow money that should go to them on a legal defense, which will never prevail. They are arguing to prevent the fair trial by jury guarantees provided in the constitution and instead substituting in unconstitutional confiscation without due process and secret tribunals all of which are acceptable practices these days.

So now the defendant is essentially broke, how can he manage his business and retain adequate legal counsel? Mind you all of this happened without the defendant ever having a chance to defend himself in court. What if the plaintiff forged or falsified evidence against the defendant? This is one–tactic wealthy corporations and individuals employ against small business people that get in their way.

Don’t let your lawyer tell you this is rarely done. If it happens to you they will still insist it is rare. It is a common procedure in the USA just restricted to those who can afford to pay large law firms unscrupulous enough to do it. To your lawyer it may be rare because your lawyer doesn’t work in a firm with 750 other lawyers defending billion dollar conglomerates that routinely will spend a few million dollars on a legal case. Most of the Internet giants do this in their litigation; look up their court cases to see it happening. Government regulatory agencies have a very similar way of doing this in the court system as well. It operates slightly more openly but has the same effect – frozen assets before you get your day in court thus preventing you from operating your business and mounting a good legal defense since you have no money.

The Summary Judgment Scam – This is another one unscrupulous tactic lawyers use to get your assets away from you. They file a case in court and serve you. They wait the 20 or 30 days for you to respond. Assuming you respond with a denial or rebuttal against the claim they then file a summary judgment motion. The argument will be your defense is frivolous and you cannot possibly win and thus it is a waste of the courts time to allow this case to proceed to a full trial. It is a way to guarantee that you never win. They want the judge to summarily dismiss your counter claim if you filed one and summarily award the case to the plaintiff.

The more ethical use of this procedure is when the defendant is properly served and ignores the complaint. Thus the defendant is not fighting back so why have a full trial and waste the courts time and money. In a summary judgment you have no chance to confront witnesses against you, or be tried before a jury of your peers, not even a trail before a judge. No day in court for you. These summary judgment motions are nasty in that they in themselves are often unfounded and designed to make the defendant (you) spend money to defend against them. Sometimes in the course of a civil case there could be seven or eight summary judgment motions all of which are expensive to defend against. If the plaintiff decides to run up a legal bill by taking numerous depositions the defense could decide to ignore going to the depositions thinking these witnesses are basically irrelevant and thus saving money.

A dangerous game for sure but if the other side is taking depositions frivolously to run up a bill on both sides (common tactic) and one has limited funds you could still stay in the game by conserving funds and ignoring the depositions letting the plaintiff go to the depositions themselves. You could also ignore overly broad subpoenas served on the defendants or on witnesses. Rather than filing protective orders to restrict the discovery power of the plaintiff back to being on point you could elect to let them run wild on fishing trips to save money and you would still be alive in the lawsuit awaiting trial where you could win. The summary judgment motion cannot be ignored. To ignore it means an automatic loss for you. Technically if you had an ethical judge and you were defending yourself the judge would look at the summary judgment motion and protect your rights. While operating pro per (acting as your own attorney) may help spare you from a summary judgment your odds of winning at trial would be statistically extremely low, too low for wisdom.

Running Up the Legal Bill – Many lawyers practice this as an integral part of their practice in the USA. They bring the other side to their knees for a settlement by making the litigation very expensive. Forget the facts, the fight now becomes surviving the lawsuit long enough to make it to trial and thus pre–trial preparation is likely to suffer greatly. If you can’t keep paying the lawyers, you will not make it to trial (think summary judgment) and lose. The ways of them doing this are numerous. They must always appear to be legitimate in their quest for useful knowledge to help them make their case or the judge may award sanctions against them for filing frivolous motions (rarely ever awarded). The lawyers that practice this are expert at it since this is how they practice law. Below are some methodologies that are used to run up the legal bill for the other side. Of course these practices favor the one with the most money. Essentially with offshore asset protection we are reversing the game and making the plaintiff spend a big fortune if they want to chase your assets to Panama or Guatemala with little or no chance of success.

Excessive Discovery – All sorts of records are subpoenaed. Tons of witnesses are set for deposition. In one instance the large law firm set a witness for deposition every day for several months continuously, knowing it would shut down the small lawyers practice. He had to go to court and was fortunate enough to get the judge to limit the depositions to one per week but this dragged everything out much longer. All sorts of records are subpoenaed. This is to bait you to spend money limiting the discovery. All sorts of motions are made up. Some motions will have names never to be found in any law books. The large firms have databases of all sorts of motions they have gotten away with over the years.

Emergency Arbitration – This is a real gem. Here the plaintiff drags you and your expensive lawyers in to try to settle. Judges love this stuff since it can clear their calendar. If you are far from the court it can really run up your bill. Very wasteful way to get legal bills high.

Long Trials – Plaintiffs ask for many days for trial. This makes it harder to get on the calendar and drag things out longer so hopefully more discovery can take place, which means bigger legal bills. Courts have found ways to streamline litigation but lawyers have also found ways to get things perverted again so they can run up the legal bills.

Venue Shopping – Plaintiffs try to file their lawsuits in a jurisdiction that will be the most expensive for you to defend in or where they can have the best chance of winning due to prejudices based on the past rulings of the court. Courts and Judges do not like to reverse on themselves. There is even a way where they can file in a federal court for violation of state civil laws. Imagine that, sounds incredible to get a federal court to enforce a state law but have seen it done successfully. They do this to get a judgment that they can enforce anywhere in the USA and also to take advantage of the way the courts have ruled on sensitive issues in this district in the past. If you have to hire counsel thousands of miles away it gets expensive. Then add in all the travel time they can inconvenience you with like with their emergency arbitration, regular arbitration, and the 25 day trial itself for which your lawyer charges $3000 to $25,000 per trial day.

John Doe Lawsuits – Do you know what a John Doe lawsuit is? I will explain this unusual tool of legal chicanery that we know works in the USA.

Let us say you are a large billion dollar corporation and you feel you have been harmed in some way but are not able to identify the party or parties responsible for the tortuous act. Say someone has been violating copyright protected material of yours by distributing it for free or for gain. You file a lawsuit in Federal Court against John Does 1–99 stating that you will identify the actual defendants, as their identities are uncovered in the course of discovery. You send a law clerk down to the courthouse and he has the court clerk officially stamp the lawsuit and now this lawsuit is live. OK now you have the subpoena power of the federal court at your disposal and there is no opposing counsel to block your subpoenas and depositions. There is no opposing counsel because the people you are suing have no idea they are going to be sued and you are not yet sure who they are or if you can even sue them yet.

So you go about your merry way issuing subpoenas for bank accounts, phone records, stock brokerage accounts, insurance records, internet records (like every website they ever visited, all email sent – yes the big ISP’s there keep copies of all this forever), credit card bills, email accounts, etc. all very lawful USA subpoenas and the judge has no idea you are issuing these subpoenas unless he decides to read the files (not likely with no opposition) and there is no opposing counsel to fight to protect the privacy of the records on behalf of their client. The company receiving the subpoena has no obligation in the USA to let the customer (think phone, bank, credit card, credit bureaus, or internet records) know that a subpoena has been served on them requesting your records. They prefer not to tell you so they do not get caught up in a fight over the records and then they may have to retain their own lawyer and run up a bill.

If it is a lawful subpoena they can just submit to it and have no liability unless there is some sort of agreement in place to notify you or protect your privacy, which would be most rare. The lawyer might even take a few witness depositions to get the facts explained in more detail. The judge need not individually approve these subpoenas for them to be valid. Normally subpoena copies are sent to the opposing counsel who can make a motion to block or limit them called a protective order. Here with a John Doe lawsuit there is no opposing counsel to get in the way of the plaintiff who can run amuck using the power of the court to get all sorts of records violating the privacy of countless people without their knowledge.

What a great tool if you are an unscrupulous lawyer. By the way this tool could be used against you at any time to get your bank records, phone records, internet records, email copies, credit card bills etc all without your knowledge lawfully. This probably does not make you feel warm and mushy inside about having assets in the USA. So basically you don’t even need to sue a real person or corporation to get to use the subpoena power of the mighty US Federal Courts.

This works best in the Federal Courts by the way but could be applied to some state and local courts. Remember the entity being served with the subpoena like the bank or stock broker has no obligation to tell you the owner of the bank account that a subpoena was served on them for your records and they could even be ordered to keep their mouth shut so as to prevent flight with the assets. Another fine example of the sheer lack of privacy and asset protection laws in the USA whereby a stranger can examine your bank records based on a lawsuit with nobody.

If you haven’t thought of it consider what happens to your bank records after the opposing law firm has lawfully obtained them. Can they enter them as evidence into the lawsuit and thus make them public record? Sure. They enter them as evidence and file the copies of the bank records, phone bills, internet records like all your emails, every website the logs show you visited, credit card bills, stockbroker records all in the courthouse into the file. This file is a lawsuit against no one but still they got it into the public records where it could be picked up and put on the Internet, in newspapers etc. Once the information gets into the public domain anyone can use it lawfully, yes even law enforcement agencies for criminal prosecutions. Can they share this information with others? Good question to ask yourself now, not after something like this happens to you.

Defendants Fight Back – To illustrate the absurdity of their civil court system gone amuck we will site some unethical tactics that defendants use against the big law firms and Judges who favor the big firms.

Recusing the Judge – A recusal is a court action where you motion the judge to remove themselves for some reason usually pertaining to his bias or lack of objectivity (prejudicial) in the case. The motion must be presented to the judge at first. A judge will rarely recuse himself or herself. If they know one of the parties in their private life they would probably recuse themselves. Appellate courts are slow to reverse a judge who refuses to recuse himself unless there is overwhelming evidence. An example would be he was once married to one of the parties in the case. So if the big slick law firm got a judge for a reason then you can recuse the judge if you have grounds, which is rare.

What is done is the defendant files a lawsuit against the judge, which now gives objective grounds for a recusal and then asks the judge to recuse himself. The judge may get mad and try to get a summary judgment dismissing the case but then again you and the judge were still adversaries in a lawsuit and recusal is proper and if the judge refused the appellate court would probably grant the recusal.

Suing the Opposing Counsel – In this scenario one side starts personal lawsuits against the opposing counsel. This lets them take depositions and is mostly to harass the lawyers. Sometimes they even sue the wife and relatives of the lawyers. A dangerous and expensive game reserved for wealthy people but it does go on. This illustrates the actual absurdity of the court systems in that country.

Locking the Other Side Out From Decent Counsel – If you live in a small town this can work. Lets say it is a divorce case. Before filing for divorce go visit all the competent divorce lawyers in the city. Have a paid consultation with them to discuss the case. Explain some non–essential particulars to them and make sure you take notes at the meeting. Then when the other party to the divorce finds out they are being divorced they go out and look for a good lawyer and find out you have created a conflict of interest with all the experienced lawyers in the area. This drives them to go out of town. The out of town lawyer will generally as a rule do worse in court than a local lawyer who knows the judges and how they like to run their courtroom. Again another manifestation of a judicial system run out of control by aggressive lawyers.

USA Trusts and USA Corporations – I know one can argue that their USA trust or corporation is not responsible for personal debts and there are court cases to back this up. Then inquire as to how much money it is going to cost you to defend the asset protection strategy against aggressive collection lawyers who know just how to make it real expensive for you to defend against them so as to bring about a painfully expensive settlement. Unless you have many millions it will not be cost effective to fight. It is a legal jungle in the USA and we cannot see any daylight in trying to protect assets in the USA using any USA based vehicle including trusts, corporations, foundations etc.

USA Real Estate Asset Protection – We get calls constantly from people who want to change the title of real estate from their own name into the name of a Panama Corporation or Foundation to shelter the asset from litigation. This can be done but is probably not going to accomplish too much in terms of asset protection unless the other side is sloppy, careless and does not have much money to spend.

The lawyers pursuing you will be curious that you no longer own a house you live in that you used to own. They will find out about it from credit reports, public record checks, having private detectives talk to neighbors, and other means. Then they will ask you if you sold the house? If so where are the sale proceeds, where was the escrow etc. They will smell a rat and eventually will ask you questions in deposition and then go to the judge and ask the judge to set the transfer aside as a fraudulent transfer in that the property was not really sold it was just a straw man transaction to avoid creditors attaching the asset and also stick you with the additional legal expense they incurred setting the transaction aside. The judge may want to hear from the Panama Corporation before he sets the transfer aside but that isn’t going to do much good unless there is an actual escrow and real money changed hands and then they are going to ask you where the money you got from the sale is now.

The same thing would happen in the case of putting a mortgage on the property through a Panama Corporation. Where was the escrow? What did you do with the money, etc? Their plan would be to have the judge set the mortgage aside as fraudulent allowing the creditor to take the real estate away to satisfy a debt. If a piece of real estate never in your name was acquired through a Panama Corporation and paid for from Panama and your name never came up in any escrow etc then that would be hard for a collection attorney to associate with you and could be overlooked. The collection attorney could take your deposition and ask you questions about any and all assets you had if there is a judgment. This is post–judgment discovery and could occur in the form of interrogatories (written questions) about your assets including any assets transferred or sold in the last few months or sometimes they go back a year or longer depending on the state laws (they call this a look back period).

We never advocate lying as part of an asset protection strategy. This sort of lying is perjury, which is generally criminal so that is not a viable plan. They will ask about any corporations you own. If a structure can be created to let you survive the questioning without lying you would be ok. Not easily done and we are not going to get into this with someone inquiring on the phone or by email who is not a paid client even if they say things like “We are not going to pay you if we do not know what you are going to suggest we do”. Sorry we will remain non–responsive to such queries, which are reserved for paid clients only. The safest position is to liquidate real estate and move the funds to a safe jurisdiction. Hopefully, this is done before any court orders are issued.

USA Attorneys and Conflict of Interest – In the USA if you go to an attorney and ask them to help you shelter your assets offshore they are going to be unlikely to help you do it effectively or even take you as a client. Why?

First of all they do not understand the offshore world in all likelihood. The laws are different than what they are used to. Secondly they cannot operate offshore and must retain an offshore law firm in the jurisdiction they would need to operate in. This means they could get sued in the USA for something the offshore law firm did that the mutual client did not like. Thirdly if the client is evading a debt and the lawyer does a good job of protecting the assets he can be sued in the USA for assisting in a fraudulent conveyance. A fraudulent conveyance is an act whereby assets are removed from the reach of a creditor to avoid attachment.

What a creditor is, is ill defined in the USA. It could be adjudicated that there was a fraudulent conveyance even though there is no judgment or court order. The reasoning is you should have known that there was a likelihood of being sued or if you were sued it would be likely that you would lose. So even if you were in an active and costly legal defense and moved assets offshore it could be argued that you were doing so to fraudulently convey the assets out of the reach of the person that might one day be a creditor. Please note that not all movements of capital offshore are fraudulent conveyances. One can relocate their domicile offshore, one could buy real estate offshore, make investments offshore, start or buy a business offshore etc. The burden of proof should be on the plaintiff to prove that the movement of assets was to take the assets out of the reach of the creditor and if you could show other reasons why the funds were put into another jurisdiction then the case is far harder for the plaintiff to win and of course much more expensive. If it comes out in the debt recovery case that the lawyer assisted the client in moving assets offshore and then the lawyer is complicit and gets sued. Remember the lawyer most likely has malpractice insurance, which means he has deep pockets. Just getting sued means the malpractice carrier will minimally raise the rates on the lawyer or drop him, this is America and that is how things work there.

What the USA “asset protection” lawyer will most likely try to do is put the client into some sort of a superficial USA based asset protection structure. This will not be effective against many classes and types of financial adversaries. The lawyer gets to charge you legal fees and earn some money. If you wind up losing your assets in court the lawyer hides behind the decision of the court to take away your assets and thus avoids any liability or exposure. After people hear the features and benefits of these USA based asset protection structures they generally do not think to ask how much it would cost to defend the structure against an attack. They also do not ask what types of an attack can be effective against getting the assets in such a structure. The list is long. The USA lawyers will not appreciate such a discourse in that it starts to expose them to liability. You will hear things like each case has its own merits, etc. You are not going to hear anything with certainty. There are lawyers who specialize in busting trusts and asset protection structures in the USA. Sometimes it can be cheaper to settle with these lawyers versus drawn out fights using law firms who bill at $650 an hour and they know this and take advantage of it. The worst part of it is that nothing in the USA will keep your assets out of reach from snooping private detectives. Once assets can be tied to you then you become a target for trouble. Private detectives get nowhere in the offshore world.

Obstructing Justice Charges Against Your Lawyer – If your lawyer in the USA is representing you in some action where the plaintiff is a governmental agency (City, County, State or Federal) the lawyer could be charged with obstructing justice. If the case seems frivolous to the prosecutor and the judge who coincidentally get paid from the same employer, decide that the defendant really has no case and mounting a defense is just running up expenses and dragging things out then the lawyer representing you can be told that he is about to be charged with obstructing justice. The prosecutor could just outright so charge your lawyer if they desired to do so. This would mean the lawyer now has a conflict of interest with you and would have to step off the case. This would mean much greater legal expenses for you. Imagine trying to convince a lawyer to step in and represent you after this happened.

Offshore Asset Protection – In Panama and Guatemala lawyer games like those described above do not exist. Corporate and foundation assets belong to the corporation or foundation. Tagging on personal debts is extremely difficult to prove and there are tight statues of limitation concerning such fraudulent conveyances to defraud creditors (three years). USA lawyers cannot practice in Panama or Guatemala; they need to retain a local lawyer if they ever wanted to do anything in these countries. Government agencies from foreign countries have no levy, attachment or confiscatory powers in Panama or Guatemala. You and your assets are much safer in Panama or Guatemala.

-Aurelia Masterson, www.panamalaw.org

What is the Best State to Incorporate Your Business?

The “Safe” and “Simple” choice for you in deciding which state to incorporate in is, to form your entity, LLC or corporation, in your Home State.

This may be the best choice for some, especially if you’re operating with a low budget, and particularly if you’re still equivocating: “I’m not even sure if my business will work.” Your absolute worst option is to operate as a sole proprietorship, so at the very least you should establish a separate legal entity.

Keep in mind that “simple” and “asset protection” are inversely related. That means if you want more protection for your current and future net worth, keeping it simple (meaning using your home state because it costs less) and/or not having separate entities for separate assets are recipes for disaster, and much more expensive than doing it correctly from the start!

The more financial success you enjoy the more complex your structure should be. The key here is to outsource these services to a company that can make it easy for you.

But Wait…Planning to Move Out of Your State in the Next Few Years?

Then your best “pivot point” is Nevada. Here’s why:

Imagine you live in and have incorporated your business in California. An unexpected opportunity arises, and a year later you move to Florida. California has an annual franchise tax fee ($800 at a minimum.) Florida does not. Do you want California to be your state of domicile, and now have to foreign register into Florida?

In this case, there’s no advantage to being linked to California. So do you dissolve the California Corporation and form a new one in Florida? That strategy means you’d lose 1-2 years of track record, which is very important when it comes to establishing business lines of credit.

If you anticipate even a possible change of circumstances in the next 2-3 years, the best approach is to incorporate or form your LLC in a state like Nevada and foreign register from the start.

It is opportunity to incorporate and keep that corporation alive in the 21st century business community. With many people, a home based business is the answer to their dreams and having the freedom to move about the country is one of the advantages of forming your entity in a state like Nevada. Makes sense, doesn’t it?

Manufacturing conference set

Manufacturing conference set
Manufacturing in Today’s Economy is the topic of a half-day conference for Northern California manufacturers on Friday, April 2, at the Sierra Nevada Brewing Co. in Chico.

Read more on Red Bluff Daily News

What Is The Best Entity?

WHAT IS THE BEST ENTITY?

By Garrett Sutton, Esq. and Kathy Spitzer, Esq.

It’s probably the most frequently-asked question that we hear from entrepreneurs, both experienced and those just getting their feet wet. So, we’ve put together this report to help you make that selection. Hopefully this information will allow you to make a more informed decision about the entity that is right for your business. But don’t despair if you don’t see your business fitting into any of the models set out below – we also offer a service where your business structure is reviewed and you are provided with our opinion as to the best entity in your situation. And, because in many cases, the company structure you choose will be based on how it will pay taxes, our top-level review will have your business plan run past a CPA, to make sure all of your options are reviewed. We can also review your existing business structure and offer our suggestions for maximizing your strategy. A review of entities follows:

Regular, or “C” Corporations (“C Corp”)

A C Corp is a great entity for a beginning business that:

• wants to retain earnings, rather than disbursing them each year;

• may have large start-up costs and expects to have losses in the first few years;

• wants to look for outside investors, and may even plan on going public;

• wants to have multiple classes of stock and sell stock to anyone, anywhere in the world;

• wants the option of providing its owners with tax-free benefits, as well as its employees;

• may have very high-income owners.

The “C” in C Corp is an IRS code section as is the “S” in S Corporations. C Corps came of age in England in the 1500′s, as the Crown’s answer to Fate and Mother Nature. At that time, most business ventures were operated as general partnerships. As general partnerships, these business ventures also featured unlimited liability of each partner, one of the key reasons general partnerships should be avoided. So, that new three-masted schooner you and your partners purchased, outfitted and sent on a trade mission to China for silk and pepper had better not sink, or you and your partners would be personally answering to the bank that loaned your business the money to buy the ship, the creditors that provided you with trade goods to outfit your ship, or to your families, if it came from your own pocket.

Unfortunately, both Fate and Mother Nature intervened frequently, and the losses were staggering. In an attempt to keep business moving, the English government invented the Corporation, which existed as its own entity, distinct and separate from each shareholder who had invested into it. The partners (now called shareholders) were liable only for the money they invested. Creditors now had only the Corporation to sue, and not the shareholders – so if the Corporation had no assets (or it did, but they were resting at the bottom of the ocean) those creditors were out of luck. (And thus the insurance industry was born, but that’s a different story.)

Because C Corps exist as their own entity, a C Corp will file its own tax return. As we explained earlier, a C Corp’s earnings will be taxed at a relatively low rate on the first $50,000 in taxable income. But you must be aware that forming one or more C Corps and putting a portion of your money into each company, with the idea that each C Corp will fit into the lower, 15% tax bracket won’t work. If you wind up owning more than 50% of one or more of those companies you have formed to disburse your wealth, the IRS will tag all of those companies as being part of a control group, and ramp their taxation rates back up towards a 38% rate. Control group status only applies to C Corps though, so be careful to plan a proper mix of entities into your wealth-planning structure.

A C Corp has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corp can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits. This is not the case in a flow-through entity, such as an S Corp, LLC or LP. In each of those cases the entity may write off the costs of the benefits, but any employee/shareholder who owns more than 2% of the entity will pay taxes on the value of their benefits received. So, if having the maximum deductions and all of the employee fringe benefits on a tax-free basis is important to you, a C Corp may be your entity choice.

C corporations are great for a business that sells products, has a storefront and employees, and may or may not have a warehouse where it keeps its inventory. C Corps don’t work well businesses that want to hold appreciating assets, such as real estate, because of the tax treatment on the sale of these assets.

But the most often-cited disadvantage of using a C Corp is the “double-taxation” issue. Double-taxation happens when a C Corp has a profit left over at the end of the year and wants to distribute it to the shareholders, as a dividend. The C Corp has already paid taxes on that profit, but once it distributes the profit to its shareholders, those shareholders will have to declare the dividends they receive as income on their personal tax returns, and pay taxes again, at their own personal rates.

There are many things you can do to avoid the double-taxation scenario. Structure the C Corp so that there are no profits left over — use all of the write-offs and deductions allowed by the IRS to reduce the C Corp’s net income. Offer great benefit plans! Pay higher salaries to yourself and the other owner/employees than you would if you were using a flow-through entity such as an S Corp. Yes, you will have to pay payroll taxes and personal income taxes on those monies, but you would pay personal taxes on dividends paid to you anyway. And it may be that in the big picture, the savings on one side outweigh the additional taxes paid on the other side.

The decision as to what entity is best for you really does, in so many cases, hinge on taxes, and that is why, with any corporate-related decision, you are wise to seek the advice and assistance of a good CPA.

Some quick things to note on C Corps:

• They can have an unlimited amount of shareholders, from anywhere in the world.

• For Nevada and Wyoming corporations, officers and directors can reside anywhere in the world;

• They can have several different classes of shares.

• They are the most widely recognized business entity in the world, and are the premier entity for going public.

In Nevada and Wyoming, nominee, or stand-in, officers and directors can be utilized and bearer shares can be issued, adding extra levels of privacy.

Sub-Chapter “S” Corporations (“S Corp”)

An S Corp is a great entity for a beginning business that:

• will provide a service;

• does not have significant start-up costs;

• will not need to make major equipment purchases before beginning operations;

• will make a sizable amount of money without a great deal of effort and expense; and

• expected growth of no more than 75 shareholders, who will all be people who living in the United States or who file a U.S. Resident tax return.

An S-Corp is structurally the same as a C corporation (i.e., it has officers, directors and shareholders), but with one key difference. An S Corp files an election with the IRS, called a Form 2553, that provides it with a flow-through tax structure as found in entities such as partnerships and limited liability companies. That means, the company’s income (and corresponding expenses, write-offs and deductions) will flow through to its shareholders, and be split among them according to each shareholder’s ownership percentage. The S Corp’s taxes will actually be paid by its shareholders, at their individual tax rates, and in proportion to their individual ownership percentages.

From a taxation standpoint, an S Corp is a great fit for a company that offers a service, because in many cases the revenues can be split and paid to the shareholders in two categories: salary and passive earnings. A flow-through tax structure means that the profits and corresponding losses, deductions and expenses are divided up among the shareholders, in proportion to their ownership percentages, and reported on each shareholder’s personal income tax return. Therefore, if your income from an S Corp is split into two streams, salary and passive, each stream will be taxed differently. Your salary stream will be subject to both income tax and payroll taxes such as medicare and social security. However, the passive income stream will be subject only to income tax. So, by taking a reasonable salary from the S Corp your tax bracket would be lower than if you were take your entire share of the earnings as salary, and the remaining share would flow through to you as passive income, and would also be taxed at this lower rate.

An S Corp is also a great entity for businesses with low start-up costs, that do not have to purchase a significant amount of assets to begin operations. For example, buying a working laundromat would be an excellent choice for an S Corp. You are purchasing a turnkey business – it’s already operating, and you aren’t going to be laying out significant cash to get it up and running. So, you will have a pretty good income stream immediately, and that income stream can best be disbursed to you and your partners, if any, through the S Corp structure. Two other great matches for an S Corp are network-marketing and Internet-only businesses. In each case, the business is likely to have no storefront, low operating costs, and probably doesn’t maintain a warehouse. Most network marketing and Internet-only businesses drop-ship from their suppliers directly to the end consumer when they are delivering products at all. Again, as these can be high-income, low cost operations, they work great in the S Corp structure.

Here’s another reason we suggest S Corps for many service-oriented businesses — To avoid being characterized as a Personal Service Corporation, or “PSC” by the IRS. PSCs are C corporations that are classified by the IRS as providing a service, such as consulting, to the general public. Now, as you may know, the United States government, in an effort to boost the economy and keep business working, assesses C corporations with a pretty low initial rate – 15% on earnings up to $50,000. That’s quite a bit lower than you would pay personally, if you were receiving that same $50,000 as salary. And, that 15% rate is also lower than you would pay if your business was an S Corp. So, to head off the anticipated revenue drain, the IRS closed that loophole by designating C corporations that provide services to be PSCs. The additional tax rate for PSC earnings can be a flat 35% or the regular C Corporate plus 15% of the corporation’s undistributed personal holding company income. That maybe higher than you would pay through your S Corp, if you took a reasonable salary and the rest as passive income. And, it’s enough, in many cases, to make the difference between going S Corp and C Corp.

A downside to S Corps is the limitation on who can be a shareholder, and what kind of shares it can issue. There can be no more than 75 shareholders in total, and no-one may take their shares in anything other than their personal names (or in their living trust). So, forget transferring your S Corp shares into an irrevocable trust, limited partnership or children’s trust. And, you can’t have any non-U.S. resident shareholders, either. Everyone who holds shares in an S Corp must file a U.S. resident tax return. And, you can only have one class of shares, which can be confining, especially if your plans include taking your company public or looking for outside investors. If you breach any of these requirements the IRS will strip your company of its S Corp status, and automatically turn it into a C Corporation, which may have a negative tax consequence.

Another downside is asset treatment. Both C and S Corps are not great vehicles if your business will hold appreciating assets, such as land, buildings, stocks, bonds, etc. The tax on them upon sale or upon distribution will be much greater if held in a corporation than if held in a limited liability company or a limited partnership. This is further explained in the book How to Use Limited Liability Companies & Limited Partnerships, written by Garrett Sutton and available at www.successdna.com.

The steps to create a C or S corporation are the same. Articles of Incorporation are prepared and filed, Bylaws are prepared, directors are elected by the shareholders, officers are elected by the directors, and shares are issued to the shareholders. This may sound difficult but we will be there to guide you through it all.

The S Corp Declaration, that Form 2553 we mentioned above, should be filed within 75 days of the incorporation date, so don’t delay if this is how you see your company proceeding. If you don’t file within that 75 day period, the IRS can deny you S Corp status for a full year, meaning that your first year of operations will be conducted at C Corporation tax rates.

The shareholders, directors and officers of the company must remember to follow corporate formalities. They must treat the corporation as a separate and independent legal entity, which includes holding regularly scheduled meetings, conducting banking through a separate corporate bank account, filing a separate corporate tax return, signing all documents related to the business in their official capacity and filing corporate papers with the state on a timely basis. If these steps are not followed, a business creditor may be allowed to “pierce the corporate veil” and seek personal liability against the officers, directors and shareholders. Adhering to corporate formalities is not at all difficult or particularly time consuming. In fact, if you have our affiliate handle the corporate filings and preparation of annual minutes and direct your accountant to prepare the corporate tax return, you should spend no extra time at it with only a very slight increase in cost. The point is that if you spend the extra money to form a corporation in order to gain limited liability it makes sense to spend the extra, and minimal, time and money to insure that protection.

Limited Liability Companies (“LLCs”)

An LLC is a great entity for a beginning business that:

• wants to invest in assets that will appreciate over time;

• is intended to be an estate-planning vehicle to transfer wealth to the next generation;

• wants its owners to hold their interests in the names of other entities or trusts;

• wants to be able to sell ownership interests all over the world;

• wants to provide its owners with flow-through taxation;

• wants to divide up the profits and losses in ratios other than strict ownership percentages;

• wants to protect its assets from creditors;

LLCs are one of our favorite entities to use. They provide both the limited liability protection found with corporations, as well as the flow-through taxation of a partnership. They allow you to divide up profit and loss allocations among the owners in varying ways — and not based strictly on ownership percentages, as is required in C and S Corps. Ownership may be held by individuals, corporations or trusts, and there are no restrictions on where owners live. Annual Meetings are not required but are strongly recommended, both as a good method of communication between the Managers and the Members, as well as establishing that the LLC is a distinct, stand-alone entity. That last point is important, as when corporate formalities are not followed creditors may attempt to pierce the veil of protection of LLCs as well as corporations.

In an LLC, the owners are called “members” and instead of stock, they receive “membership interests” based on the value of assets or services contributed by each member. LLCs can either be governed collectively, by all of its members, or by one or more Managers, who are voted in by the Members and who carry out the day to day functions and business of the LLC. Managers can also be members, or they can have no ownership rights in the LLC at all. Manager may be individuals or entities. An LLC governed by a Manager or Managers is, not surprisingly, known as a “Manager-managed” LLC, while a collectively-governed LLC is called a “Member-managed” LLC. The rules by which the LLC is governed are set out in its Operating Agreement, which is signed by all of the owners.

One of our favorite ways to use LLCs is in connection with real estate investing. Properties held in an LLC are easy to transfer, and incur less tax on a subsequent sale than would be assessed if that same property was held in a C or S Corp. LLCs work well for family asset based entities, where the goal is to increase the family wealth, plan for the future, and maximize tax savings. You can put other things into an LLC, such as day-trading accounts, stock and bonds, insurance policies and annuities.

One of the greatest things about using an LLC is the asset protection aspect, especially in Wyoming and Nevada. Under Wyoming and Nevada law, any creditor who attempts to collect a judgment against someone holding their assets in an LLC is barred by law from seizing the LLC’s assets. That creditor must use a procedure called a “charging order” to recover any monies they are owed. Under a charging order, a creditor receives the right to collect distributions from the LLC when (and if) profits are distributed, but that creditor does not receive the right to vote, or have any impact or control over the daily operations of the LLC. That makes you a much smaller target for litigation-minded individuals.

Limited Partnerships (“LPs”)

Like LLCs, LPs are a great entity for most of the same reasons. They are particularly excellent for use as an estate planning vehicle, because properly structured, they allow parents to transfer wealth to their children tax-free, while maintaining complete control over the assets and the day-to-day operations of the LP. This control continues even after majority ownership has passed, on paper, to your children.

This is because an LP has two types of partners: (1) a general partner who is actively and personally responsible for managing the partnership and (2) limited partners who are passive owners, with no management rights. The general partner can be an individual or another entity, and has broad powers to obligate the LP and manage its daily operations. However, unlike any of the other entities we have discussed, a general partner remains personally liable for the debts incurred by the LP. So, for protection purposes we tend to recommend that you use a C Corp, S Corp or an LLC to serve as the general partner, thus insulating you personally from liability.

A limited partner is ‘limited’ to ownership of his or her limited partnership interests, and has absolutely no control over how the entity operates. Limited partners receive passive profit distributions from the LP. The distributions are taxed at each limited partner’s individual personal income tax rate.

LPs can be a great way for parents to transfer their assets to their children. Using an aggressive gifting strategy, parents can pass along ownership of assets to their children and provide their children with an income stream that will be taxed at their children’s individual tax rate. How to employ a gifting strategy is discussed in detail in Garrett Sutton’s book, How to Use Limited Liability Companies & Limited Partnerships, available through www.successdna.com.

LPs can be an excellent choice for a family with children who may not be mature or capable enough of making good financial decisions. Because limited partners cannot interfere in the daily LP operations, even though they may have majority ownership of the LP assets, the children cannot remove or sell assets from the LP. Even though the general partner may have as little as 2% of the LP interests, it still retains complete control over the LP’s operations. This can be a great way to save your kids from themselves.

Another good reason to use LPs in an estate planning situation has to do with the law. Because LPs have been around much longer than LLCs, the law around how they operate is much more settled. It is very difficult for limited partners to wrest control from the general partner, no matter how high their ownership percentage. Generally speaking, for a general partner to be removed from control takes a finding of fraud or serious misdoings by the general partner.

An LP is governed by a formal Limited Partnership Agreement. Because an LP provides a great deal of flexibility, the written limited partnership agreement can be drafted to tailor the business and family planning requirements of any situation. There are very few statutory requirements that cannot be changed or eliminated through a well drafted limited partnership agreement.

The same great asset protection and charging order procedure we outlined in the LLC section also applies to LPs. If you are sued personally and you own LP interests, a creditor cannot reach into the LP and seize its assets. However, if the LP is sued directly, its assets could be subject to seizure and sale. If you are intending to use an LP to own and operate rental real estate, then make sure you put a comprehensive insurance policy in place to protect you and the LP’s assets from potential claimants.

We hope this overview has been helpful. For further information, or to arrange a consultation with one of our attorneys, please call 1-877-297-5399.

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Taxation: Nevada and Wyoming

A common misperception is that by forming an entity in Nevada or Wyoming you won’t have to pay any income tax on the entity’s profits, no matter where you are located.

First of all, business entities pay federal income tax, regardless of where they are. Secondly, they pay state taxes generated in a state where business is conducted.

However, depending on the type of business, Nevada or Wyoming is an excellent place to form your entity. Both states have minimal tax obligations and reporting requirements, great flexibility in company operations and excellent privacy protection. For example, if you operate a company that provides consumer goods and merchandise, forming your entity and warehousing your products in Nevada can reduce or eliminate state tax obligations.

How much you can reduce or eliminate depends on the type of entity you use and where you live. For example, if you have a flow-through Nevada entity such as an S corporation or an LLC and you live in New York, your profit distributions will have to be reported on your income tax return and will be subject to New York taxes. Operate that same entity as a C corporation however, and it would not pay state income tax on its profits. But, anything being distributed to you either by way of salary or dividend would be subject to New York taxes.

In many cases, from a strictly tax-oriented point of view, you won’t save money by forming a Nevada or Wyoming entity, because you will be required to register that Nevada or Wyoming entity in your state of operation and its earnings will then fall under that state’s taxation laws. Use the “substantial nexus” (or physical presence) constitutional test to determine whether or not your entity will be required to pay state sales, income or other taxes.

“Substantial nexus” is defined as meeting any one of the following criteria, and entities failing this test are generally not required to pay state income taxes:

• Owning or leasing property in the state

• Having an employee in the state (that includes you)

• Engaging an independent contractor within a state to solicit sales in that state

If you meet any of these criteria, then your Nevada or Wyoming entity will be required to register to do business in that other state, and its earnings will be subject to that state’s income tax laws and regulations. However, United States Public Law 86-272 prohibits states from taxing businesses where activity in that state is limited to soliciting sales of tangible personal property, provided that all orders are sent to a separate state for approval and all goods are shipped into the state via common carrier. So, for example, if you have an Internet website selling goods all over the United States and shipped from Nevada, your entity may beat the substantial nexus test. Be careful though – you will be considered an employee (thus failing the test) if your involvement in the entity is not passive (i.e., you do nothing but let the checks come in). And, even though you may beat the substantial nexus test, it applies only to state income taxes, and does not apply to sales/use taxes or any other state taxes.

If your entity fails the substantial nexus test, you have two options. You can either form a Nevada or Wyoming entity and register it to do business in another state, or you can form your entity directly in the state where it will be considered doing business. There are some great benefits to forming an entity in Nevada, as follows:

Privacy. Nevada and Wyoming do not provide shareholder information to the IRS. Nevada also allows the issuance of “bearer” shares, allowing for maximum anonymity and privacy. In addition, nominee officers and directors can be provided to further enhance privacy. Nevada law is very protective of the corporate veil and will rarely breach it and attack the owners personally where companies are in good standing and have maintained minimal corporate formalities, such as the preparation of annual minutes.

Flexibility. Directors, officers, shareholders, managers, members, general and limited partners do not have to live in or hold meetings in Nevada or Wyoming. Foreign nationals may own and operate Nevada or Wyoming corporations from outside the United States (with the exception of S corporations). Telephone meetings for directors and shareholders are permitted. One person may hold all director and officer positions, and directors and officers do not have to be stockholders. Corporate bylaws can be made or expediently changed by Directors. These and other favorable features of Nevada and Wyoming corporate law provide for great corporate flexibility and ease of maintenance.

Favorable Capitalization. Nevada allows you to issue shares for cash or services provided to your entity. Nevada also allows you to issue shares for services yet to be provided, unlike many other states. A Nevada company may purchase, sell, hold or transfer shares of its own stock, another benefit not available in all states.

Low Annual Maintenance Costs. Nevada and Wyoming have minimal reporting and annual maintenance fees. The Secretary of State requires that a $125 List of Officers and Directors be filed once per year along with a $100 business license fee, for an annual fee of $225. Wyoming’s annual fee is $50. As such both states are excellent low cost locations for asset protection

Things You Cannot Do With A Business Entity

There some things that you cannot do with business entities, and which are illegal in most states. The three major illegal uses for business entities are as follows:

1. Fraudulent Conveyance. A fraudulent conveyance is a transfer of assets made intentionally, or found to be intentional, in an attempt to avoid creditors, spouses or judgments. If you have already been served with court documents, or anticipate that you may be sued, or may be the subject of divorce proceedings, you cannot transfer your personal assets into a business entity to avoid having them seized.

For example, you hold a duplex in your own name and a tenant is injured when the roof collapses. The tenant retains an attorney and you receive a letter notifying you that the tenant is claiming damages against you for his injuries. You had been meaning to transfer title of the duplex to your LLC, and decide that now would be a good time. Unfortunately, the matter does not settle and when it goes to trial, the tenant’s attorney makes a claim that you fraudulently conveyed the duplex into the LLC to protect it from a valid claim. In addition to finding you at fault for the tenant’s injuries, the Court also rules that by transferring the duplex into the name of the LLC after you had been notified of the tenant’s claim, you have committed a fraudulent conveyance. The Court rules that the duplex must be transferred back into your name, and the tenant allowed to attach their judgment against it. The Court also fines you for your attempt to avoid the judgment by conducting the transfer in the first place.

2. Medicare Fraud. Medicare fraud occurs when individuals transfer assets into the name of a business entity in order to reduce their personal income or conceal their assets to pass income and net worth tests for Medicare eligibility.

For example, your parents are retired, and living on a small, fixed pension. They also hold several real estate properties, which have a combined value of $1.5 million. Your father’s health is failing, however, and your mother is anticipating that his medical expenses are about to increase dramatically. Although your parents live on a fixed pension and qualify for Medicare on that basis, by adding in the value of their real estate holdings, they become ineligible. Your mother is wondering how she will keep up your father’s medical expenses on their pension, and is anticipating having to sell at least one of the properties to make sure there is enough money to cover them. You feel that if your parents formed a Limited Partnership with a corporate general partner, and transferred all of their real estate holdings into the Limited Partnership, the assets would no longer be in their name. Without having the assets in their name, they could then report their pension income on their Medicare application and qualify for benefits. This type of transaction is considered fraudulent and is prohibited.

Medicare fraud is a federal offense, which can result in severe monetary penalties.

Please bear in mind however, that there is a difference between Medicare fraud and proper estate planning. Estate planning is a strategy to minimize the tax burden on your estate, and to ensure that you are able to transfer a maximum amount of wealth to your heirs with a minimum tax payment to the federal and state governments. The best way to avoid a possible claim of Medicare fraud is to make sure that estate planning begins early, and while everyone is in good health.

3. Money Laundering. Money laundering happens when the proceeds of crime are funneled through a business entity in order to create the appearance of legitimate income. For example, a drug ring forms an LLC to purchase real estate properties. The members use a regular corporation as the Manager of the LLC, and use the proceeds from sales of drugs to purchase their membership interests in the LLC. The LLC then takes the money received from its members and purchases luxury real estate on Martha’s Vineyard.

This is money laundering, which is a criminal offense at both state and federal levels. Parties convicted of money laundering can face jail, monetary penalties and the seizure and sale of assets bought with the proceeds of crime.