I could go on for days about why we use them and the distinctions between them and about why you’d use one versus another but I’d like to make one point at the start. Did you notice I did not mention “C” Corporations or “S” corporations for asset protection? Some of you are holding real estate in an “S” Corps. and that can be a fatal mistake. “S” Corps and “C” Corps., while they do provide some asset protection do not provide nearly the protection that these other ones do.
There is a magic tool that comes along with LPs and LLCs and it’s called: “Charging Order”. This is your new best friend. Charging order is a legal concept that was developed and applies only to Limited Partnerships and Limited Liability Companies. It does not apply to “S” Corps, “C” Corps, Sole Proprietorships, and Partnerships. If your lawyer has not told you about Charging Order and the benefit of it and why you have to have one of these two entities somewhere in your asset protection structure, he/she has done you a terrific disservice.
Here is what a charging order does. Number 1 it says: “You can not reach that asset”. Imagine you have a million-dollar building sitting inside an LLC or LP. Can the bad guy get at the million-dollar building? No, he cannot. But what it will do is open up the door for the bad guy to get at the profits. Let’s pretend there is $100,000 in profits. The bad guy can’t get at the building but at first glance it seems like he can get at the $100,000. But we’re not going to stop there. You see when we work together we’re going to set up more than one of these entities and one of them is going to be a management company.
If there’s $100,000 in your LLC that is subject to attachment and we have a management company over here that is going to manage, in a better way, our million-dollar building, do you think that management company should be allowed to charge a fee for that service? Of course! And how much do you think they will charge? The answer: about $100,000. Now how much money is left for the bad guy to get? ZERO!!
So far we have protected the million-dollar asset and shifted our profits to another company so that the bad guy cannot get it. This is where the Charging Order steps in and introduces you to your new best friend and partner – the IRS. Let’s say the bad guy gets $100,000 in income. Do you think that income will be taxed? Absolutely! The bad guy is left standing with his hands in the air saying: “But Judge, these guys were working with Drew Miles! I didn’t see a nickel of that income because they did this thing where they shifted the income out of the company!” Guess what the IRS would say to that: “TOO BAD. You are going to pay tax on that money because we are going to impute the income to you!”
And now the bad guy is left in the position where he has to pay about $50,000 in tax on MONEY HE NEVER GOT. How’s that for asset protection?
