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The Corporate Colander

By Rob Lambert - Email Editor

Date : 19-July-2007

Many “Asset Protection Experts” are pushing Corporations (along with Limited Liability Companies (LLCs) and Family Limited Partnerships (FLPs)) as the ultimate Asset Protection vehicles.

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 is simple. With a simple, small company (whether it is making hundreds of thousands or millions) 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 installing 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 product, which in turn somebody feels wronged by, they 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's actions 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 conquer. 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 a operating business) it is difficult for a creditor to get to all when there is a problem with one.

Another thing that corporations do not do is keep creditors of a shareholder from acquiring an ownership interest in the business. If a major shareholder of a small corporation has creditor problems, it is easy for his creditors to acquire his shares. With the shares comes control of the company as well as all of the financial benefits (and woes) formerly accruing to the shareholder.

COUNT ON IT: Stock in a closely held corporation is available to creditors unless it is held in another protective entity, which is often a properly structured Asset Protection Trust.

So, the claims you have been hearing for years that corporations insulate you from creditor claims is pure propaganda. It is simply NOT TRUE. The corporate veil is really the corporate colander.

I wish you a healthy and protected week.

Best,

Rob Lambert

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ABOUT THIS EDITOR:

Rob Lambert, Founder and former law professor is considered to be foremost expert on tax compliant asset protection structures. A contributing editor to Lexus Nexus debtor creditors series of law books Rob's passion is implement client wealth plans that stand the test of time and hold up under duress.

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