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Protect Your Identity: Protect Your Assets: Safety

#2 in a series of 3

In the last article we discussed how to acquire and own assets while preserving our privacy through the use of the “nominee trust”.  In this article we learn how to acquire and hold an asset in a way that does not expose our other assets to the potential liabilities of our new asset.  An example will help.  We consider buying a large sailing yacht, and better yet, putting it out to charter, so that hopefully we earn income therefrom.  However, we don’t want an uninsured or underinsured yachting accident wiping out all of our other assets, such as our businesses, homes, stocks and bonds.

Enter, the concept of limited liability.  We know something about limited liability, since we know that corporations limit the liability of their shareholders to the amount of their investment and no more.  A shareholder limits his or her liability to the amount that he or she has invested in the corporation.  We might not want to run out and form a corporation every time we purchase a boat or other asset, since there are substantial tax, recordkeeping, and other ramifications of corporations.  On the other hand a new business entity may fit the bill nicely.

Beginning January 1, 2000, California authorized the use of a “single-member” “limited liability company” or “LLC”.  A LLC is a business organization that provides its “members” with the same limited liability as corporations do.  From an income tax perspective, however, the single-member LLC is disregarded as a separate entity and therefore does not have the double taxation and other tax drawbacks of corporations.  In addition, LLCs do not have the significant corporate recordkeeping requirements, such as annual meetings of shareholders and directors.  As a result, sophisticated real estate and other investors now transfer each of their major properties to separate single-member LLCs to insulate each of their properties from the liabilities of each of their other properties.

What are the drawbacks you ask?  California charges an annual $800 minimum franchise tax on each LLC.  In addition, there is a gross receipts tax based upon a sliding scale from $865 for receipts in excess of $250,000 up to a maximum of $7,785 for receipts in excess of $5,000.000.  Is this a reasonable “insurance” cost?  The decision is yours, but the cost of the yacht slip for one month will equal the annual $800 franchise tax, and if your receipts are $5,000,000, you probably won’t mind the $7,785 tax in any event.  The peace of mind in limiting the yacht liabilities to the yacht, and not the rest of your assets, may very well tip the balance in favor of LLCs.

Is the limited liability unlimited?  As with corporations, the single-member LLC must be careful to maintain the integrity of the LLC by maintaining separate LLC bank accounts, accounting records, and liability insurance, so that creditors cannot “pierce the liability veil” by claiming that the entity was really just the owner’s “alter ego”.  Of course, any entity used to perpetrate fraud on others will be disregarded by the law.

As always, consult your trusted accountant and attorney with respect to your individual circumstances, as this article has been prepared for informational purposes only, does not constitute legal advice, and is not guaranteed to be correct, complete or up-to-date.

In the next article, we learn to put the last two article’s lessons together to increase both the privacy and safety of our assets.

 

 

 

 

 

 

 

 

 

 

"Bruce,
Thank you for the your email and the information you provided.  Your counsel is always appreciated and needed."

Who We Are:

Image of Bruce Leonard Beal

The present firm arose from Bruce's move from the Los Angeles area to Dana Point, where he and his wife wanted to live since they first  discovered it. 

Bruce comes from the Senior Counsel position in a large world class international technology, engineering and construction corporation with thousands of employees, hundreds of large clients, world class projects, hundreds of affiliates, and complex transactions and litigation.  Before that, he gained significant major law firm experience, including arguments before state appellate and supreme courts.

His desire in moving to Dana Point was and still is to bring his world class experience to smaller and emerging businesses.  This experience produces more valuable legal and business judgment from him than is available from newer attorneys or attorneys whose practices are more specialized and localized.  His extensive resume is here Resume

Marlene Legally, Marlene has assisted Attorney Beal in many areas of his law practice and has developed a good working knowledge of registering trademarks and copyrights, transactional due diligence, and organization of various business entities. Her extensive resume is here Resume.

Disclaimer: The purpose of this article is to provide information, rather than advice or opinion. It is accurate to the best of my knowledge as of the date of the article. I have no duty to update this article. The information, examples and suggestions presented in this article have been developed from sources believed to be reliable. This article should not be viewed as a substitute for the guidance and recommendations of a retained professional and should not be construed as legal or other professional advice. In addition, I do not endorse any actions addressed herein, unless they are produced or created by me.  I recommend consultation with me or other competent legal counsel and/or other professional advisors before applying this material to any particular factual situations.

 



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