First, you should recognize that adequate business insurance insurance is a very good form of asset protection. If your insurance covers the type of "accident" you are hoping to address, the insurance company will pay for your defense and any judgment up to the limits of your insurance policy. Insurance is very often worth the up front cost. You should speak with a knowledgeable insurance broker in order to make sure you obtain appropriate insurance with appropriate limits and deductibles.
Second, when entity 1 has insufficient insurance and/or assets to pay a judgment, the plaintiff's lawyer will often seek to "pierce the corporate veil" and reach the assets of the owners of entity 1. Under that equitable doctrine, the Court will look at several factors including but not limited to whether entity 1 was adequately capitalized for the type of business conducted, were assets diverted to avoid creditors, whether funds were commingled, whether the corporate formalities were followed, whether the entity and owner share the same offices, whether the entity and the owner share the same officers and directors, and will an inequitable result if the corporate veil is not pierced. Associated Vendors Inc. v. Oakland Meat Packing, Co. 210 Cal.App.2d 825 (1962).
Finally, you cannot simply siphon the money from the active business entity to a separate entity holding the assets as means of asset protection. If you do not have adequate consideration for the transfers from entity 1 to entity 2, entity 2 could be subject to a claim for fraudulent conveyance or constructive fraudulent conveyances.
You are setting up three entities, each of which will have to pay the annual franchise fee of $800, and file a tax return (which can get expensive). Each of these entities will have to respect the form of the entity or be subject to a claim to pierce the corporate veil. It is not very hard for a plaintiff's lawyer to figure this scheme out and file against all three entities.
Particularly if accidents are a common part of the business, sufficient insurance is the best form of protection. Yes, there is an upfront cost, but you most likely will have to have some anyway, so if you are concerned about protecting your personal assets, a good amount of insurance is the best way to go. Don't let legal shysters sell you a complicated, expensive setup that is very easy to mess up.
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Your company must be adequately insured, or hav assets other wise an injured party may try to ignore the company setup and try to pierce the corporations if there are not adequate finances to pay an adverse judgment. Please feel free to contact me for more advice by calling and setting up an apointment
My name is Stephen R. Cohen and I have practiced over 38 years and can be reached at 213-819-1171. I practiced mainly in Los Angeles and Orange County, California. I am not seeking clients from existing relationships with other attorneys, and give only limited advise over the phone (the phone is primarily used to set appointments), these services do not create an attorney client relationship. I apologize for mispelling< as I am a lousy typist, My answers may offend as I do not believe in pulling punches or sugar coating the truth. Further regarding courts in other states my opinions are largely based on logic and what I think is the modern trend which is to consider the needs of the child.
From my perspective, asset protection is putting a legal barrier between an individual and his/her net worth in order to avoid frivolous / bogus lawsuits by using tax neutral legal tools that do not compromise ownership or control. It should not be focused on hiding assets from the IRS or existing, legitimate creditors.
The first way to protect your assets from business liabilities is the obvious one: accurate bookkeeping, respect of highest security standards in your industry, detailed employee polices, and ethical business practices in relations with providers and clients.
I always recommend to my clients and prospects to get as much as insurance coverage as possible. However, insurance policies have a lot of small print, and, more important, we live in a very litigious society where whoever can sue for whatever reason with very little (financial) risk. As you can read on this forum, a lot of attorneys advise: “Sue first, ask questions later”.
An LLC is a very efficient legal tool to hold and manage a business and to insulate the risk it generates. However, it does not protect you or your personal assets: If the amount at stake is high enough, a plaintiff may try to pierce the corporate veil by holding you personally responsible by theories as negligence or gross negligence.
Depending on value and the revenue generated by your business + your personal net worth (bank and brokerage accounts, primary residence, investment real estate) , you may want to consider combining your LLC with a legal that was specifically set up for asset protection purposes: an LLC filed in a state with strong charging order rules such as AZ.
If the total net worth to protect is above the 500k benchmark, any asset protection plan should include an exit strategy, that, if necessary, allows you take to take (the ownership of) your assets out of reach of US courts without compromising ownership or control.
You should consider scheduling a consultation with an attorney that has expertise in the area of asset protection planning.
Good luck and congratulations for planning ahead.
Douglass Lodmell is the nations #1 Asset Protection attorney and has clients in all 50 states, protecting over $4 Billion in client assets. Answers given by him in this forum do not establish an attorney-client relation. He advises to seek a specialized attorney in the area of your interest for legal representation.