The better job that you do in providing clear and concise explanations that people can understand, the more transparent you are being. This helps to build a level of trust which can translate into a better relationship and ultimately greater profitability; not to mention an excellent way to head off any potential conflict which may arise.
As far as the traditional tools that most people think about when it comes to the topic of asset protection, of course there is a lot of documentation involved there. Whether you have structured your business as a limited liability company, a corporation, an S corporation, or any other type of legal structure, all of this is done with documentation. One of the big- gest mistakes that I see people make is to mistakenly follow what I refer to as the “vaccination theory” of asset protection. In this approach, a person sets up their legal entity with the initial paperwork, they presume that they are forever protected as a result of this establishment, and they never look at or think about it again. This would be nice but let me assure you that it doesn’t work that way.
When you have a business, you have to maintain sufficient documentation not only for your legal entities but for the ongoing actions of the business. Have you held meetings of the owners?
What about a meeting of the officers, directors, and/or managers? Did you keep a record of those meetings? Do you have resolutions authorizing certain actions? These are all somewhat routine and mundane but are all necessary nonetheless.
To take things a bit further, one of the ways that I help clients to safeguard their assets is through a process of structuring. What this refers to is the process of separating the ownership and operation of different assets and/or activities into different legal entities to keep from exposing those assets and/or activities to the liability associated with other assets and/or activities. I understand that the previous sentence may have been a bit confusing so let me translate it for you: you don’t want to put all of your eggs into one basket. As such, you need to divide up your eggs (assets and/or activities) into different baskets (legal entities) in order to keep them protected. How is this done? If you guessed that it’s accomplished through documentation, then you are correct.
Through this process, you must note that it’s not just the documentation of setting up the separate legal entities, you also have to maintain documentation governing how the entities interact with one another. Is there a licensing agreement? What about a marketing or management agreement? Does one of the entities lease assets from another entity? Is there a lease agreement to memorialize the arrangement? If you hope to protect yourself, you’ve got to make sure that you have the appropriate documentation in place.
In my work with clients, much of what I do is to explain to them that there are many different questions that must be answered. Not only do you need to know “what” to do, you also need to know “why” you are doing certain things, as well as “how” to go about doing them. That’s part of what this series of articles is all about. Keep reading these articles and also be sure to let us know if you need any assistance with your asset protection. Remember, our job is to help you to do everything possible to cover your assets.