Use the Law to Bulletproof Your Assets
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Financial freedom is obtained by investing in high-quality assets that produce a steady and reliable flow of income. From a legal point of view, you need to protect these assets. By keeping these assets in your name, you are exposing them to unnecessary risks. Limited liability companies form the foundation of financial freedom. They provide a degree of protection not offered by other legal entities.
Limited liability goes back to the 15th century when English law awarded limited liability to monastic communities and trade guilds.
The Economist, in its millennial edition, praised limited liability as the key to industrial capitalism. The modern world is built on two centuries of industrialization, much of which was built on equity finance, which in turn was made possible by limited liability.
Limited Liability is Two Things
In the world of business entities, some entities offer high protection against personal liability and others offer none. A corporation offers the most protection. If you buy shares in Boeing, and suddenly Boeing planes start falling out of the sky, the families of the victims will not be able to come after you and sue for wrongful death. On the other hand, if you are a sole proprietor manufacturing and selling vaping devices, and people die of respiratory failure, families of the deceased may come after you and sue you personally. Limited liability corporations provide a hybrid between these two extremes. Liability protection consists of two elements. Firstly protecting your assets when your business is sued and secondly the protection of your business assets when you are sued personally.
Thing 1: Liability Protection from Business Obligations
You will need to set up the entity correctly and maintain the entity adequately to ensure maximum protection at all times. If you do not incorporate and maintain the entity adequately, the courts can pierce the corporate veil and that legal separation of assets is no longer provided. Bernie Madoff, Chairman, and founder of the Wall Street firm Bernard L. Madoff Investment Securities LLC admitted in 2009 that the wealth management arm of his business was a multi-billion dollar Ponzi scheme estimated to be worth almost US$65 billion. In 2001, I participated in an investment roadshow in the United Kingdom to raise money for a fund of hedge funds, which included Bernie's funds. We applauded his uncanny ability to constantly deliver annual returns of between 13 and 15 percent. In 2009, he was found guilty of securities fraud, investment advisor trust fraud, mail fraud, wire fraud, money laundering, false statements, perjury, making false filings with the SEC, theft from an employee benefit plan and sentenced to 150 years in federal prison and $170 billion in restitution. In this case, the corporate veil was pierced and the law made no distinction between Bernie's assets and the assets in the limited liability corporation. Limited liability companies score very high marks for personal asset protection provided you do not take a page out of crooked Bernie’s playbook.
Thing 2: Liability Protection from Personal Obligations
This covers the protection of business assets from a personal lawsuit. This is where limited liability crushes the corporation like a bug. If you are sued personally, to what extent are your business assets placed at risk? Those Boeing shares that you own are not protected and can be used to satisfy the debt. On the other hand, if you are a shareholder in a limited liability company, some provisions place the assets of this corporation out of play. Limited liability is perfect for your own business and ideal for owning real estate, bonds, stocks, and alternative investments and funds.
Example of Bill the Easy Rider
Bill started a successful construction business five years ago. He owns heavy equipment, trucks, construction tools, and the office building from which he runs his business by way of a limited liability company. He also owns five Harley Davidson motorcycles, amongst them the Easy Rider, the machine ridden by Peter Fonda in the 1969 flick Easy Rider, a 1928 JH "Two-Cam" and a 1936 Nucklehead with an estimated combined value of more than a million dollars. All these machines are registered in the name of his company (their separateness could be brought into question if these hogs are not used in the production of income – but that is a separate legal discussion). One Sunday morning, he is cruising down the PCH and for a fraction of a second, loses concentration and swerves onto incoming traffic. A car that was driving towards Bill is forced to take evasive action and drives off the road into the base of a pedestrian bridge. The accident results in severe injuries to the driver of the car, but not to Bill who was able to get back into his lane on time. Bill's Geico insurance only pays $100,000. He is sued in court for damages and medical expenses and the plaintiff is awarded $180,000. Given that Bill has formed a limited liability company, the plaintiff is not able to come after the business assets. The assets encumbered in the company are protected. Legal provisions specifically protect these assets.