So I wanted to get up something important here for all my fellow start-up entreprenuers. I had Bobby Casey from Global Wealth Protection write out some simple points to avoid when setting your company up and common mistakes start up entrepreneurs make leaving themselves vulnerable with no asset protection. No one wants to get to a success level only to have everything striped from them. So all the information he talks about I urge you to take a closer look at in your own business. This applies every bit to online business as well. You can also contact him For addt’l information on any of the subjects @ Global Wealth Protection .
Asset Protection for the Entrepreneur
by Bobby Casey, Global Wealth Protection LLC
Frequently I work with entrepreneurs who have reached varying degrees of success helping them to properly structure their businesses in order to minimize risk, minimize the tax burden, and maximize their gain.
Entrepreneurs are one of my biggest client groups. The reasoning is that while entrepreneurs are very focused individuals and highly driven towards success, they rarely, if ever, take the necessary precautions to protect their assets. As the focus is on the next contract, the next sale and the next deal, focusing on tedious details like proper business structure and asset protection always seem to take a back seat.
As a fellow entrepreneur, I certainly understand the drive to focus on the money making endeavors. I started my first “real” business at age 21 and grew it to over $7M in annual revenue. The focus was perpetual sales and profits. In my mind, the details would work themselves out. Is this you?
The reality is only you are responsible for the details and if you don’t take the time to attend to them, you are risking your financial future by becoming a target. The global economic environment has deteriorated over the past few years and there are financial predators everywhere. You need to take the necessary steps to protect you business and financial assets before someone targets the bulls-eye on your back.
Let’s discuss some common mistakes entrepreneurs make in business structuring and asset protection planning. For the sake of this exercise we will deal with experienced entrepreneurs who have generated some level of wealth through their business and investment activities. However, even if you are just starting out you should read on and attempt to learn from the experience of others.
Wrong entity for business:
I have seen many entrepreneurs work for years with the wrong entity for their business interests. For example, I have seen many real estate entrepreneurs use an S corporation or C corporation to own the real estate assets.
This is a huge mistake. As a child growing up, my father owned a construction company and real estate development company. He also preached the need to have your assets out of your own name – which is good – however he held all of his real estate holdings in an S corporation.
The problem here is that as a shareholder of your own S corporation, you shares are at risk from outside creditor litigation – or litigation that can arise from activities unrelated to your business. This presents a very real threat to your financial well-being as outside creditors can come from anywhere; unrelated personal injury claims, personal guarantees from unrelated holdings, divorce, etc.
Using a C corporation is even worse because you have the same liability risk from outside creditors plus you lose the pass through tax benefits from using an S corporation.
There are a multitude of business entities to chose from; C corporation, S corporation, Limited Liability Company (LLC), Limited Partnership (LP), Partnership, Sole Proprietor, and a few others. There are even offshore entities to consider depending on your own personal or business situation; Seychelles IBC, Nevis LLC, Belize IBC, etc.
Ultimately, the entrepreneur is typically focused on his day-to-day business activity and not the proper planning of the business structure.
DIY business and tax planning:
As a fellow entrepreneur who started on a shoestring budget, the idea of saving as much money as possible certainly has its appeal, but at some point you need to seriously consider hiring professionals to handle certain aspects of your business.
A wise man years ago told me, “Don’t get so busy doing the $10/hour jobs that you cannot find time to do the $1000/hour jobs.” This isn’t to say the professionals you hire are only worth $10 per hour, but the point is that you need to focus on what makes your business successful.
Are you a software developer? If so, why are you spending so much time on business and tax planning when you can outsource that to professionals who are much more competent than you in this field. Do you also change your own oil in you car and mow your own yard?
Every successful entrepreneur needs to have small team of professionals who can provide expert and non-biased advice on various aspects of your business and asset portfolio. At a minimum you need a competent lawyer and accountant. As you wealth grows, you should look into adding a financial planner, asset protection consultant, mentor, advisory board, and possibly board of directors.
Owning personal and business assets in own name:
Realistically I should put this item first as this is one of the biggest mistakes I see entrepreneurs make. With my personal clients, I help them develop their own asset protection plan. The first step in this plan is to create a veil of privacy around your assets.
This is accomplished in a variety of ways using many different tools. As each person has a different situation, there is no way to offer generalized advice here, but the idea is best summed up in the well known John D Rockefeller quote, “Own nothing but control everything”.
The purpose for asset protection planning and creating a veil of privacy around your assets is to lower your profile risk. If you are the guy with the big house on the hill, driving the Ferrari around town, eating at expensive restaurants and picking up the bar tab for your friends, you aren’t very low profile and you are very susceptible as a litigation target.
As previously noted, the more wealth you have, the larger the bulls-eye on you back. If you chose the more extravagant lifestyle, it is even more important for you to create a veil of privacy around your assets.
Assuming you don’t need asset protection planning:
In dealings with my clients over the years, the vast majority of them came to me AFTER they had a major issue to deal with. These issues come in a variety of forms; personal injury lawsuits, business lawsuit, mortgage loan default with personal guarantee, divorce, state or federal tax lien, erroneous criminal prosecution, liability associated with teenage driving children, and the list goes on and on.
In December I had 2 clients who were facing a $1.5M judgment against each of them for a mortgage default related to some unforeseen environmental issue they were completely unaware of prior to purchasing the property in question. Both of them separately told me they never imagined 6 months ago they would be in a position of potential financial ruin. Both of these guys were in their upper 50’s and this could wipe them out financially forcing them to work well into their retirement years.
Asset protection planning can be equated to health insurance. You don’t buy health insurance hoping to get a brain tumor in order to get your money’s worth. However, you also don’t call your insurance agent on your way home from your MRI appointment where you were delivered the bad news. At that point it’s too late. Financial ruin is upon you.
Lack of financial education:
At the risk of generalizing the entrepreneurial mindset, many of the business owners I know are not very financially astute. Most entrepreneurs are salespeople. Sure, there are many different types of people out there; some inventors, mathematicians, engineers, and medical professionals, but most of them are salespeople at heart. It seems to be a common thread among entrepreneurs that gives them the drive to push for growth and improvement.
What most of them lack though is the desire to deal with the details of the business. And the most important details of the business is the financial aspect. A basic understanding of accounting principles and financial management should be required for all entrepreneurs, but especially once you have reached a point where you are starting to acquire money and assets.
I would highly recommend you to pick up some books on economics, accounting and investing to gain a better understanding of finance and the world investment markets. This will benefit you as you grow your cash horde and learn how to diversify your asset holdings.
Lack of asset diversification:
This is extremely common among entrepreneurs. We focus all of our energy on creating, building and growing our own companies and we become laser focused on our own enterprise. As well we should too. This is our bread maker.
Keep in mind though, while you have direct control over the management and operating of your own company, there are still many outside factors that can have a very serious negative impact on your revenue and your profit, and thus your asset portfolio.
I have seen this time and time again, both with clients and my own business ventures, where there is a sudden drop in revenue that was completely outside of your control. From a personal example, I owned a company (sold it a few years ago) that had relatively large contracts with some of the US’ largest retail operations.
Several years ago, one of our larger clients came to us at renewal time and said they were not going to extend our contract. The service we performed for them was vital, but the new management of the company (theirs) has decided to take the service program ‘in-house’ which meant our contract would be eliminated – immediately. This meant a sudden loss of several million dollars of revenue and a large part of our profits.
This happens in many small companies every day. In the same way financial planner would not recommend you keep your entire stock portfolio tied up in one stock, I would recommend that you take some of your ‘chips’ off the table and diversify into different asset classes.
I am not here to go into macro economic discussions and portfolio theory, but there are many different categories of assets you can invest in, each with its own pros and cons; publicly traded stocks, corporate bonds, sovereign bonds, foreign currency, commodities, real estate, private debt arrangements, and private company investments. If you don’t know where or how to find and make these investments or you don’t have time to properly vet them, you need to see one of the points mentioned above and hire a professional to manage your non-core investments.
Bobby Casey is the Managing Director of Global Wealth Protection LLC, an asset protection and offshore consulting firm working with clients from around the globe. Mr. Casey has undergraduate degrees in international business, finance and economics from the Universityof North Carolina and a masters in entrepreneurship from MIT. He has started, bought, and/or sold several businesses over his career and has traveled and lived in many different countries gaining a global perspective. You can subscribe to Mr. Casey’s free weekly newsletter or reach him by visiting his website at http://www.GlobalWealthProtection.com.
There you have it, Thank you Bobby for taking the time to get something over to me. I have come to realize how important Asset Planning is, and how much easier it would be if I had done it from the start.
The author explains how C and S corps aren’t the best forms of business entities, however he doesn’t give us a solution or alternatives. Does he have any insight on this?
Chris Waldron says
Jason, Bobby Casey responded to your question below.
Bobby Casey says
Yes, in almost all cases I would recommend an LLC in lieu of either S or C corps. LLC’s offer significantly better asset protection, easier compliance, less paperwork, much more flexible, and you can chose your tax status – partnership, s-corp, or c-corp.