A Seminar by WILLIAM A. TAYLOR, Esq. (The Business Lawyer)
As the rich get richer, in high priced California and the west, the poor find ingenious ways of getting adequate money to remain living here.
One way to earn enough money is the old fashioned way: suing those who have the money. The rich, who themselves are not mentally dense (which is probably why they are rich in the first place – unless they earned their money the old fashioned way: by inheriting it), employ several methods to preserve their wealth and protect it from the depredations of the poor.
One method they employ is to separate their business from the land on which their business operates – and to place each in separate corporations or separate limited liability companies (LLCs). That way, when the poor attack the corporation or the LLC with a lawsuit, the potential damage is limited and localized to that separate victimized entity: the LLC or the corporation, and is not spread to any other parts of the wealthy person’s estate.
Three Groups of Assets In the clearest description, a business person’s estate is composed of three different asset groups: Group One: the residence and all of the assets acquired with the wealth created by the business (or inherited); Group Two: an operating business; and Group Three: the land on which the business operates.
Loss at Work Most of the liability experienced by business people comes from their work activities. For the entrepreneur (the business owner), liability comes in direct proportion to the number of employees. Accidents happen and, with employees having nothing but their jobs to lose (as opposed to their houses – which are not at risk), the opportunities for accidents multiply as more people add their contributions to the work product. If the business is run as a corporation, a successful lawsuit against it could shut the doors and cause the business to be sold to raise enough money to pay the judgment.
Land Ownership Loss As a property owner, the wealthy person could suffer a legal set-back that has the effect of losing the land from which the business operates. Though significant, the loss of the land is not fatal to the money generating business. It can lease space from the new owner or simply move to another location and continue operating.
Personal Loss It is only as a normal individual that the business person risks all three groups of assets. If, as a normal (nonbusiness) individual, the business person accidentally harms someone in an amount beyond insurance coverage, all of her or his assets are vulnerable to being sold to pay for the damage, those assets being the business and the land from which the business operates. However, most people live pretty benign lives, lives not likely to create enough harm to swamp normal insurance limits. This reality makes the segregation of assets in separate corporations or LLCs the optimum plan for protecting assets.
Summary In summary, the most protective plan is to separate the business from the land on which the business operates – and to place each in separate corporations or separate LLCs. That way, when a lawsuit is filed against one or the other, the potential damage is limited and localized to that separate victimized entity: the LLC or the corporation, and is not spread to any other parts of the business person’s estate.
Multiple Businesses The question often arises about the advisability of placing more than one business in a corporation (or LLC). Each of the businesses in a corporation is an asset of that corporation; and each separate business is eligible to be taken by a creditor to satisfy a judgment against the corporation. If the value (net worth) of BIZ #2 is not enough to satisfy the judgment creditor, BIZ #1 might supply the needed capital when sold.
Therefore, each business requires its own corporation to protect each business from a loss caused by another business.
Multiple Parcels The question often arises about the advisability of placing more than one parcel of land in an LLC. Each of the parcels of land in an LLC are assets of that LLC; leaving each separate parcel eligible to be taken away to satisfy a judgment against the LLC.
The advice that is given is for each parcel to be placed as an asset in a separate LLC, with nothing more in the LLC. Stated differently, the ownership of three parcels of land would call for the creation of three different LLCs to house them. The loss suffered against any one of them would be limited and localized to that LLC alone.
Leases If the business is in one corporation and the land on which it operates is in an LLC, it will be necessary for the land to be leased to the business via a formal written lease. The lease is traditionally written to be a triple net lease, one where all of the responsibility for the building and its upkeep are on the tenant (the business). The lease should also call for the tenant business to indemnify the LLC (the land owner), further localizing the damage of a judgment to only one entity – in this case, the business.
Enriching the Attorney The advice above seems designed to enrich your local attorney, who will happily create all of the corporations and LLCs necessary for localizing liability and creating all of the connecting legal documents. However true that may be, the expense of it all is greatly outweighed by the benefits to be gained from the procedure.
Piercing the Separate Entities If certain conditions exist, creditors can cut through the corporate or LLC entities to hold the owners personally liable in spite of all of the elaborate legal structuring. Some of those conditions are: a) not observing formalities, e.g., controlling one entity through another or not paying dividends; b) commingling assets, e.g., banking accounts; c) severe undercapitalization; d) fraud [there are more conditions]. The finding of a sufficient number of these conditions will allow a creditor to legally disregard the separateness of the corporations and LLCs from the owner(s) and directly attach those owners – wasting all of the effort put into creation and maintenance of the separate entities.
Summary You are advised to create separate entities for each separate business and each separate parcel of real estate or lease of real estate. You are advised to create and maintain all of the paperwork that would normally exist in such entities and relationships. The cost is not insignificant, but should be considered comparatively – with the cost of loss of multiple assets.
William A. Taylor, attorney at law, does business as “THE BUSINESS LAWYERS.” He can be reached at (510) 893-9465,