When it comes to asset protection, a lot can go right and a lot can go wrong. Typically, the difference between success and failure lies buried in the details that often seem insignificant and trivial but can cause immense pleasure or pain later depending on your actions.
I think it is human nature to simplify processes. Why work through steps 1 thru 4 to reach 5 if an alternative approach allows you skip steps 2 thru 4 and still arrive at 5 no worse for wear. Many of us would readily adopt this shortcut if skipping the 3 additional steps did not adversely affect our process. The problem in following this approach is steps 2 thru 4 were probably placed there for a reason that may not be readily apparent to the untrained eye.
The situation I am referring to is one that typically exists between your CPA and asset protection attorney. Take the case of my client Susan for whom I set up multiple single member Limited Liability Companies to protect her various rental properties. A separate corporation was created to manage these LLCs with a secondary business purpose of buying, rehabbing and selling property.
When the structure was complete and the rental properties deeded into the appropriate LLCs, I explained to Susan that her corporation’s role as manager was to manage the properties held by the various LLCs, this included the payment of bills, collection of rents, etc.. I instructed Susan to create a bank account for each LLC so it could deposit rental income and pay bills associated with the properties held therein. One particular bill is the management fee owed to the corporation for its monthly service. The management fee was determined in separate property management agreement with each LLC.
Simple enough right? Each LLC will collect rent, pay its own bills, then distribute the profits to Susan as the sole owner. All Susan needed to do was deposit the money into the appropriate LLC account and write a few check each month. For some unexplained reason, multiple bank accounts proved to be too troublesome for Susan and her CPA convinced her closing the LLC bank accounts and running everything through her management corporation could simplify it.
The CPA explained to Susan that he could keep her taxes straight in QuickBooks through ledger entries that allocate income and or loss to the appropriate LLC. Susan could run her business out of just one checkbook. Horray! Susan could bypass steps 2 thru 4 with the help of a well-meaning CPA. Thus, her life was simplified.
For 3 years, everything ran as planned until a lawsuit struck Susan’s corporation. Susan fought the case but she did not prevail and a judgment was entered against her corporation. Susan believed she could dissolve her corporation and walk away from the judgment. After all, her assets were held in separate LLCs so her properties were protected from the debts of the corporation. Unfortunately, this was not to be because the plaintiff sought to attach the assets of each LLC. The plaintiff was successful.
Susan was stunned and asked me why the plan I created for her did not protect her assets. I patiently explained that the plan I had created was not followed. In her desire to keep life as simple as possible, Susan took the advice of her CPA and effectively disregarded the separate existence of her LLCs when she closed down their separate bank accounts and chose to run everything through her corporation. The court said as much in its decision citing Susan’s’ failure to treat her LLC’s as separate business entities by not having their own banks accounts.
Do not follow in the footsteps of Susan. Each of your businesses should be able to stand on its own. Do not let a CPA or other professional convince you that by bypassing certain steps you can still reach the same end. Quite possibly, from a tax standpoint, this may be true but your plan was created for asset protection and by seeking shortcuts you may be inadvertently shorting out your own plan.