Asset Protection & Piercing the Corporate Veil

We've all heard of Asset Protection and the suggestion is typically to create an LLC and hold title in that legal entity. In and of itself, this can be a major hurdle in closing and financing. Purchasing all-cash will always work and title can be in the entity name. However, when purchasing via a mortgage loan, the lenders typically require title in your personal name. This will then expose the Due On Sale clause if there's a subsequent change of ownership to the legal entity. Some will question that and scoff saying "it never happens", but IMO, talk is cheap and those recommending 'just do it' have no risk like you do!

That is just the tip-of-the-iceburg on the subject, as there are lots of conditions that must be met to make asset protection via a legal entity work:

The entity must be created by filing in one State - - typically we choose a State with beneficial tax consequences.

Then, to be allowed to operate in any other State, the name of our new entity must be Foreign Filed - - IN EVERY STATE we wish to do business in. This creates annual filing and taxation issues for each. See smallbusiness.findlaw.com

Every entity (the original or each of the foreign filed) needs a Registered Agent, which will likely add an expense.

(see en.wikipedia.org/wiki/Registered_agent).

Then there's the question Nexus --

see www.journalofaccountancy.com/issues/2010/

and another link below.

Even then, the Court can still remove the entity protection if the operation of the entity is not up to snuff.

Factors Courts Consider in Piercing the Corporate Veil

(see www.nolo.com/legal-encyclopedia/)

There is no real separation between the company and its owners.

The company's actions were wrongful or fraudulent.

The company's creditors suffered an unjust cost.

The most common factors that courts consider in determining whether to pierce the corporate veil are:

• whether the corporation or LLC engaged in fraudulent behavior
• whether the corporation or LLC failed to follow corporate formalities[A]
• whether the corporation or LLC was inadequately capitalized (if the corporation never had enough funds to operate, it was not really a separate entity that could stand on its own), and
• whether one person or a small group of closely related people were in complete control of the corporation or LLC.

Some corporations and LLCs are especially vulnerable when these factors are considered, simply because of their size and business practices. Closely held companies are more susceptible to losing limited liability status than large, publicly traded corporations. There are several reasons for this.

Failure to follow corporate formalities.

Commingling assets.

[A] following corporate formalities:

• Annual list of members
• Notice of Stockholders meeting
• Minutes of Stockholders meeting
• list of attendees
• election of officers
• see smallbusiness.chron.com for details

Nexus issues: see pg 18, Nexus problems for

pass-through entities and their corporate owners

in the powerpoint presentation by Ernst & Young

www.tei.org/chapters/new_york/Public%20Documents/

WoW - - so how did we get pushed into this in the first place? IMO, it was FUD. We want to make some passive money and do not want to expose our personal lives and assets to possible litigation. Read that again POSSIBLE litigation. Is there anything in life that carries a 100% guarantee (other than Ben Franklin's Death & Taxes)?

We have things like EAO insurance(see www.insurancejournal.com/magazines/)

and Umbrella insurance(see www.geico.com/information/)

BUT you best protection is AVOIDING STUPID ACTIONS, as even with an LLC, EAO and Umbrella insurance, you STILL can be sued and loose. Be an informed consumer and look before you leap.

[ I am not affiliated with any resource sited above]