Do You Have a Big Target On Your Back?

December 9, 2008

Choosing the right business structure used to be much easier. There were bad business structures, really bad business structures, and good business structures. Now, it’s more complicated.

Choosing the right business structure used to be much easier. There were bad business structures, really bad business structures, and good business structures. Now, it’s more complicated. If you own real estate, financing is tough, and new lending rules from Fannie Mae and Freddie Mac mean that you need a layered business structure system.

If you own a business such as a medical practice, asset protection has always been a concern. You need to protect your personal assets from something that might go wrong with the business. Now, you have just as much risk toward your business from personal lawsuits. That means you need a layered business structure system.

And with economic uncertainty, your biggest risk isn’t even from outside your business; it’s from within your business. You need a new solution for the business challenges of 2009 and beyond!

• If you haven’t updated your business structures within the past year, you might as well put a big target on your back!

This is a true story from my clients: Three friends went into business together. They knew they had to protect their personal assets from possible risk of the business, and so they formed an LLC (Limited Liability Company) to operate the business through. Two partners went one step further and held their 1/3 share inside two other LLCs. The third partner didn’t think there was any risk and held her 1/3 share in her own name.

Soon after the business started, one partner left. The ending was relatively amiable and didn’t wind up in court. After that, the business grew and was profitable, but the partners’ personal relationship failed after a few years. This time, though, the ending wasn’t amiable, and the split resulted in numerous lawsuits being filed.

The partner who held her interest in her own name was now at a serious disadvantage. Because she hadn’t contained her business risk within an LLC, the lawsuits named her personally. The other partner was safe, behind the liability shield his personal LLC provided. If he lost, he may lose his half-share of the business, but his personal assets were safe. But the other partner held her interest personally, meaning she had no such protection. All of her personal assets were at risk, leaving her with no choice but to defend each lawsuit that was filed, and pay out thousands of dollars in legal fees. She eventually won, but it was a very expensive lesson.

None of this had to happen. If the owner had held her interest inside an LLC or other protected business structure, and she had followed the steps she need to protect it, the lawsuits would have quickly gone away.

In 2009 and beyond, you must have a layered structure system if you want to have true asset protection. In today’s uncertain economic times, you need to protect everything much more carefully.

• If You Have a Limited Partnership or a Single Member LLC, You Are Probably Going to Get Audited This Year!

The Limited Partnership and Single Member LLC have become audit red flags in and of themselves. Avoid these at all costs! Ironically, the Limited Partnership is about the only structure I used to use for my real estate investor clients. How times have changed.

Tax laws are changing—rapidly. It’s predicted that we’re going to see more tax law changes in 2009 than in any other year since World War Two. The strategies that worked in the simpler times of just a few years ago simply don’t work anymore. Keep current with tax and financial information and make sure your advisors do as well.

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Diane Kennedy, CPA is the author of the best-selling “Loophole of the Rich” and “Real Estate Loopholes”, along with 5 other books. For more tax-saving information, see her websites www.LessTaxForDocs.com andwww.TaxLoopholes.com