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The Myth Of The Corporate Shield

By Rob Lambert - Email Editor

Date: 05-Jan-2006

Many “Asset Protection experts” are pushing LLCs, FLPs and corporations (both domestic and foreign) as the ultimate Asset Protection vehicles. What I intend on doing is a series of newsletters dealing with the specific issues of each.

BOTTOM LINE: LLCs, FLPs and corporations are just a start.

I am sick and tired of hearing domestic entities touted as solid Asset Protection entities. The truth is that they are not. PERIOD.

The reason why is simple. With a small company (whether it is making hundreds of thousands or millions of dollars) the people who control the entity (whether it is a partnership, LLC or corporation) are responsible for any and all bad acts of the company.

IN SHORT, the “corporate shield” with small companies is nothing but an illusion.

WHY?

SIMPLE: The people who control the company are also held responsible for the bad acts of the company. For example, if you incorporate a roofing business and it does something bad (like install tiles incorrectly) the president of the company (the Big Boss in Charge) is also going to be held responsible for an error. If you run a normal small company you are responsible for its errors even if you are incorporated….. Period. You can count on being a defendant.

This is not true with a large publicly held company like IBM. If IBM turns out some defective ThinkPad (I know, IBM sold this division!), somebody wronged by a defective product will sue the company and maybe the president, but not the hundreds of thousands of public shareholders who hold stock but do not exercise control.

The problem is that, with many privately held companies, the people who own the stock also run the company. These folks are PERSONALLY responsible for errors of the company because they had the power to stop the harm, and, arguably, they are the people who approved the company acts which caused the harm.

So: DON’T COUNT ON THE CORPORATE VEIL TO SHIELD YOU FROM LIABILITY.

With this said, I think it is wise to use multiple entities. Why? The main reason is to divide and conqueror. If there is a problem with one entity (and we assume you own several, such as an apartment house, interests in a donut shop and an operating business) it is difficult for a creditor to get to it all when there is a problem with one.

The other reason, particularly with FLPs and LLCs, is that these entities are especially helpful in separating ownership from control. This is often the main reason why they are useful. They also sometimes offer charging order protection (more on this in a later newsletter in this series).

What I plan on doing is a series of newsletters outlining the many issues relating to FLPs, LLCs and corporations. These entities are helpful and good; just don’t be drawn into the mystic promise that they add huge Asset Protection benefits. In most cases they don’t. I will dissect this, and when we are done, you will know the differences and the bottom lines.

I am still stuck on Asset Protection Trusts because I do not trust the U.S. Legal System to be fair.

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