Business Planning

Corporations Used in Asset Protection

Nevada Corporations
Secrecy statutes, bearer shares, and Nevada's non-cooperation with the IRS has made this entity a marketer's dream. But is there any real substance behind the hoopla?

Employee Stock Ownership Plans (ESOPs)
Employee Stock Ownership Plans (ESOPs) are qualified retirement plans that corporate employers may establish to provide benefits in the form of ownership in the corporation for which the employee works and any of its related companies.

Reverse Alter-Ego
Discusses the developing theory that allows a creditor to invade the assets of a corporation based on the debts of its owner.

Alter Ego
Discussion of the alter ego argument as utilized by creditors to break through the liability containment of business entities, including a list of the major opinions involving alter ego arguments in the debtor-creditor context.

Charging Order Protected Entities

Family Limited Partnerships
Also known as FLPs, these are the hottest planning tool going, and we offer extensive treatment of this structure. Many of the same rules apply to the Limited Liability Company (LLC) as well.

Single Member LLCs
Considers the special situation of LLCs with only one member. In a nutshell, no charging order protection but otherwise treat similarly to a sole shareholder corporation.

Introduction to Charging Order Protection
An overview of charging order protection, and its use in asset protection planning.

Charging Order Protection Cases
A state-by-state compendium of opinions relating to the issuance of charging orders and liquidation of partnership or membership interests.

The Series LLC Center

Uniform Limited Liability Company Act

Uniform Limited Partnership Act

Plans and Programs for Business Owners and Employees

• 419(e) Welfare Benefit Plans
  http://www.assetprotectionbook.com/419(e)_plans.htm
  Funds that provide certain benefits for the welfare of employees that can be creditor protected by the ERISA anti-alienation benefits if organized as a trust.

Specific Industry Concerns

• Asset Protection for Physicians
  http://www.assetprotectionbook.com/physicians_asset_protection.php
  Discussion of available strategies that physicians should consider to better manage their liability risks.

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Key Terms Used In This Section

Charging Order Protected Entities (COPEs)
Entities that restrict the remedies of a creditor of an owner to a “charging order” that entitles the creditor to distributions made in respect of that ownership interest, but do not allow—at least initially—the creditor to actually take the ownership interest. From an asset protection standpoint, the advantage is obvious: The creditor has no immediate means of getting at the assets in the entity even though the creditor holds a judgment against one of the owners.

Charging Order Protection
This prevents a creditor of an owner of particular types of business interests from reaching the assets of the business and from gaining voting control over the business interest. Rather, the creditor can only get a court order charging the debtor’s interest with the debt, meaning that the creditor will receive any distributions made in respect of the debtor’s interest. If the person in charge of making such distributions never makes one, the creditor may be out of luck. Originally, this protection arose to protect nondebtor partners from the debts of other partners of a business enterprise. Typically, the availability of charging order protection is limited to partnerships and limited liability companies, which is why Family Limited Partnerships are a popular asset protection tool.

Charging Order
An order issued by a court to a judgment creditor which essentially compels an entity of which the debtor is a partner or member to direct to the creditor until the judgment is satisfied any distributions that would otherwise have been made to the debtor.

Check-the-Box Regulations
Regulations promulgated by the Secretary of the Treasury in 1996 which allow an LLC simply to choose whether to be taxed as a partnership or a corporation.

Combo Platter
A widely-marketed cookie-cutter asset protection structure involving an FLP with the limited partnership interests owned by a FAPT. The strategy is that if a creditor attacks the FLP, the FLP is liquidated into the FAPT and all assets moved offshore.

Companies Limited by Guarantee
A company that has not been capitalized by cash, but rather by the promises of the shareholders to provide a specified amount of cash if required by the company to satisfy liabilities. A similar example is the traditional Lloyds of London syndicates were essentially companies that were capitalized by the unlimited guarantees of their members (the “Names”) to stand behind the syndicates’ underwritings.

Controlled Foreign Corporation (CFC)
In very general terms, the U.S. Internal Revenue Code term used to describe a foreign corporation that is owned in substantial part or controlled by U.S. persons. For example, an International Business Company formed in the Cayman Islands and owned and controlled in majority party by three U.S. shareholders would likely be treated as a CFC. A CFC has very extensive reporting requirements, and the failure to disclose the existence, operation or revenues of a CFC may be a felony in some instances.

Corporate Shell (a/k/a Corporate Veil)
Slang for the liability limiting advantage of a corporation, which limits the liability of shareholders to the equity they have contributed.

Corporation
A fictitious legal entity authorized by statute, created by the filing of Articles of Incorporation with the relevant jurisdiction, and capitalized by issuing shares of stock. A corporation can provide protection to the shareholders against the liabilities created by the corporation in excess of the corporation’s capital.

Directors’ and Officers’ Liability (a/k/a D&O Liability)
The direct, personal liability of directors’ and officers’ of corporations for their acts that adversely affect the corporation (and thus giving rise to a shareholders’ derivative action) and for the corporation’s acts which adversely affect others (as in the case of employment discrimination claims).

Disregarded Entity
An entity for which the tax consequences are attributed to its owner as if it did not exist. Note that this does not mean that the entity is “tax exempt”, which is a common and false claim made by tax scam artists.

Extreme LLC
See Xtreme LLC, below.

Family Limited Partnership (FLP)
A limited partnership which holds the family’s business or investments, with the idea that the parents will gift interests in the partnership to their children at a discount, thus potentially saving federal gift and estate taxes. The term is planner’s slang, since there is no entity called a “family limited partnership” that is referenced by any statute, nor is any such entity referenced in the Internal Revenue Code.

General Partnership (GP)
A partnership that consist only of general partners, all of who are jointly liable for the liabilities of the partnership, and all of whom have management rights to the partnership. In asset protection planning, general partnerships are usually to be avoided.

Golden Parachute
A defensive arrangement whereby if a hostile party attempts to seize control of the corporation by changing the corporation’s officers, the officers are given large severance benefits, thus increasing the costs to the hostile party.

International Business Company
A corporation authorized by the statutes of a debtor haven which (with the exception of banking, of course) can only conduct business with persons or entities outside the debtor haven, and not with the locals. In other words, it is a company incorporated in a debtor haven but required to be used elsewhere.

Leasing Company
A company used to hire employees and lend those to the underlying business, to reduce profits in a liability-producing company or to shift employment liabilities away from a valuable business.

Limited Liability Company (LLC)
A hybrid type of legal entity that combines certain traits of corporations with certain other traits of partnerships and other noncorporate legal entities. LLCs allow their owners (called members) to have the best of all worlds: pass-through tax treatment like a partnership, limited liability like a corporation, unheralded flexibility in ownership and management structure, and charging order protection.

Limited Partnership (LP)
A partnership that consist of general partners who are jointly liable for the liabilities of the partnership and who have management rights to the partnership, and limited partners whose liability is limited to their contributions to the partnership and who have no management rights, i.e., general partners are true partners and limited partners are mere passive investors.

Management Company
A company formed primarily to act as a manager of another entity, distance control of the other entity from the owners, and absorb liabilities arising from the management function.

Manager-Managed LLC (MemLLC)
An LLC that provides for one or more designated managers to have management rights, and with the members having no management rights. With a Member Managed LLC, the members are in a role very similar to limited partners.

Member-Managed LLC (MgrLLC)
An LLC that allows the members to have management rights, very similar in operation to a general partnership, but with some degree of limited liability for the members.

Nevis LLC
See Offshore Limited Liability Company, below.

Nominees, Nominee Shareholders,
Nominee Directors, Nominee Officers
These are persons who act on behalf of the true shareholders, directors, or officers of the company, and who typically have executed an undated resignation which allows their replacement at any time.

Offshore Limited Liability Company (OLLC)
A limited liability company formed pursuant to the laws of a foreign debtor haven jurisdiction, such as the Nevis LLC.

Offshore Management Company
A company formed in a foreign debtor having jurisdiction primarily to act as a manager of another entity, distance control of the other entity from the owners, and absorb liabilities arising from the management function.

Partnership
A partnership is an association of two or more persons carrying on a business venture as co-owners for profit. Partnerships come in two basic varieties: general and limited.

Piercing the Corporate Veil
Where a court disregards the legal fiction of the corporation and imposes liability against the shareholders.

Poison Pill
A defensive arrangement whereby if a hostile party attempts to seize control of the corporation by accumulating stock, additional stock is issued so that all shares are diluted, thus increasing the costs of the hostile party’s acquisition.

Professional Corporation (PC)
A form of corporation that can have only certain licensed professionals as shareholders, and which typically does not protect the professional shareholder from lawsuits brought alleging their professional negligence.

Registered Agent
An agent for the corporation who is domiciled in the state of incorporation and is available to receive service-of-process on behalf of the corporation.

Series LLC (a/k/a “Cell LLC”)
A form of LLC allowed by the statutes of only a few jurisdictions (most popularly Delaware) that allow membership interests to be divided into categories or “cells” with liability for particular actions of the LLC theoretically limited to the capital contributed to the particular series in which the operations of the LLC occurred.

Single-Member LLC (SMLLC)
An LLC with but one member, who is typically also the manager, formed in a jurisdiction that allows a single member. Because they are relatively untested, the liability protections of SMLLCs are mostly theoretical, but should be similar to that of a sole-shareholder corporation.

U.K. Limited Liability Partnership (UKLLP)
A limited liability partnership formed under the United Kingdom’s Limited Liability Partnership Act of 2000.

U.K. Limited Partnership (UKLP)
A limited partnership formed under the United Kingdom’s Partnership Act of 1907.

Xtreme LLC
A very complex arrangement involving a Series LLC and complicated interrelated and diverse transactions utilizing a variety of irrevocable trusts.

About AssetProtectionBook.com

This website is by far the largest and most comprehensive creditor-debtor and asset protection resource available anywhere. This website hosts thousands of pages of articles, cases, statutes, analysis, and many other resources to assist planners and judgment collection professionals in researching contemporary creditor-debtor issues.

While the articles and analysis on this website are most often drafted from a planner's point of view, creditor attorneys and judgment collection professionals will also find many of these resources to be highly useful. We have tried whenever possible to be balanced in our analysis by pointing out strengths and weaknesses in different structures and strategies from both the planner's and creditor's viewpoint.

This website was primarily created to support our book Asset Protection: Concepts and Strategies (McGraw-Hill 2004). Because of the publishing agreement with McGraw-Hill Companies, Inc., certain articles which were used as the basis for that book have been withdrawn from internet publication. It is suggested that the book be used as the primary resource, and that the other materials on this website should be used as supporting materials only as needed.

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