By Mike Enemigo
Most people can benefit immensely by utilizing a strategy that many entrepreneurs and criminals alike have used for years. The strategy is based on two very simple principles: 1) A corporation is separate from the owner of the entity, and 2) The fact that true asset protection can only occur when the incentive to sue or in the case of criminal activity the opportunity for seizure is non-existent. Let’s take a look at each of these points and then review the strategy to show you how everything works.
Corporations Are Separate From Their Owners
The most important thing to remember about any business entity is that it is separate from its owners. You are separate from your corporation, and your corporations are separate from one another. This is the very nature of the business entity, and it is the foundation upon which limited liability was built.
Because a corporation is an artificial person, you can do business with your corporation, and your corporation can do business with anyone else. This can include any other corporation you may own and or control. Your task in doing any type of multiple entity strategy is to maintain that separation. You separate you from your business by observing the rules of corporate formality, by keeping your corporate records clear and up to date. If we recognize that a corporation is not you, then we are halfway home to understanding the terrific benefits of this strategy.
This brings us to the second major point in our strategy. Asset protection can only occur when your adversary has no incentive to sue you or your business. It also occurs when the IRS, FBI, or any other agency can’t seize assets they allege belong to you during a criminal investigation. How do we accomplish such a lofty goal? Well, let’s look at something that may seem a little strange; poverty. While this may sound silly, ask yourself this question: How many destitute people are on the wrong end ofmulti-million-dollar judgments? When was the last time you picked up the morning paper and saw a headline which read, “Joe Homeless sued for 5.5 million”? On the other hand, you read every day about someone with assets being sued, or large corporations being hauled into court. Is that because the homeless person never gets into trouble? Not at all! It is probably because “Joe Homeless” isn’t worth suing! Think about it. Would you bother suing somebody who you knew couldn’t possibly pay a judgment? Not likely in this day and age when most attorney’s work on a contingency fee basis – meaning they don’t get paid unless there is something to take.
You may be thinking that it is all well and good to talk about using poverty as an asset protection tool, but poverty is no fun. You don’t want to be poor. You own your own business so you can have financial destiny. Well, in this case you are.
Keeping these two important points in mind, let’s take a look at the strategy itself. The benefit of the strategy is you will be able to protect your business and personal assets from litigious attacks and seizures, and you might have the potential to reduce your taxes.
For purpose of this report, we are going to call your home-state business 123, Inc. The other corporation in our example is going to be called ABC, Inc. ABC, Inc. is a corporation that will be formed in Nevada to provide a service to 123, Inc.
123, Inc. Takes A Loan
Let’s say that your 123, Inc. corporation goes to the bank and borrows a significant amount of money. The bank is going to want collateral to guarantee repayment. Let’s say that your corporation is required to offer all of its assets as collateral for the loan, and is then required to pay large sums of interest on the note, so large that it may have difficulty even making the payments. Therefore, 123, Inc. would always be in debt, and if the payments aren’t made the bank can take everything 123, Inc. owns and pledged as collateral to re-pay the note. In essence, 123, Inc. could be wiped out. Perfect! Who would want to sue such a company?
Nobody, because even if they won, the bank gets paid off first, and then there’s little likelihood of having anything left. Again, this accomplished the goal of “removing the incentive to be sued”, but who wants to be in debt? Unless, of course, you were in control of the bank!
It is very possible through very proper planning and structuring that you can have your cake and eat it too. How? Because if the lending company was your own ABC, Inc. corporation, you have protected everything you own! You now have a home state corporation that has a terrible debt, and is unattractive to any adversary’s lawsuit. But at the same time, you are calling all of the shots with its creditor. You have the best of both worlds. Even if somebody does sue 123, Inc., and obtains a judgment, what are they going to get? The same thing they would get if they sued “Joe Homeless”– only headaches. You, on the other hand, are in the driver’s seat. Even if you do not win the lawsuit you are judgment proof because ABC, Inc. is the bank. You have total control over it, and you decide what happens if 123, Inc. can’t pay its interest, and you decide what happens if someone tries to take your assets from 123, Inc.
Remember that ABC, Inc. has the first lien on everything. Anybody trying to get at the assets at 123, Inc. must pay ABC, Inc. off first.
There’s one more little detail we need to cover here, and that is paying interest on the loan made from ABC, Inc. This is a real loan, requiring a set interest rate to be set. Of course, interest on the loan is tax deductible and this would be true in 123, Inc.’s home state. But, if ABC, Inc. were located in an income tax free state such a Nevada, how much income tax will it have to pay to its state? None! Thus, the more interest you can pay on the note, the more income you will move from your home state.
In short, the strategy involves two corporations. The first is your primary business, and for our example we called it 123, Inc. The other company will be a Nevada corporation, which we have called ABC, Inc.
123, Inc. borrows money from ABC, Inc. and as a result goes into debt. ABC, Inc. takes all of the assets of 123, Inc. as collateral for the loan, and files the necessary documents to perfect its security interest, such as UCC-1 financing statements for personal property, and mortgages or Deeds of Trust for any real estate. 123, Inc. pays interest to ABC, Inc. which reduces its state income tax, and ABC, Inc. has a first position on the assets of 123, Inc., making it a very unattractive lawsuit or seizure target.
That, in a nutshell, is the ABC-123 strategy.
Source: Get Money Magazine
About the Author:
Mike Enemigo is a former drug dealer. He’s now a successful “prisonpreneur” who’s turned his dirty hustle clean. With over 25 books published and many more on the way, he’s America’s #1 incarcerated author. He’s passionate about entrepreneurship and he’s written several books which teach prisoners and street hustlers how to make money legally so they can avoid the traps of prison and crime. Among these books are Hood Millionaire: How to Hustle & Win LEGALLY! (also published as Get Out, Get Rich: How to Make Money Legally When You Get Out of Prison!), and CEO Manual: Start a Business, Be a Boss! (Also published as The CEO Manual: How to Start Your Own Business When You Get Out of Prison!). For more information on Mike and his books, visit thecellblock.net, where you can also subscribe to his blog, The Official Blog of The Cell Block, where he and other TCB authors provide raw, uncensored news, entertainment, and resources on the topics of prison and street-culture from a true, insider’s perspective. Be sure to also follow Mike on all social medias at @mikeenemigo and @thecellblockofficial.