On any field, of any game, it’s the strongest, healthiest, most dedicated players that win time and again. In the game of business, the same is true. Just finishing the race is not the same as winning.
Let’s face it, if simply producing your product or providing your service was all it took to be successful, everyone would have a thriving success of a business. But there’s so much more to it for today’s business owners regardless of what industry you’re in, product you manufacture, or service your render. There are so many unexpected disruptions interfering with your operations.
But are these disruptions really unexpected? Are they not predictable?
The truth is that overcoming disruptions is essential if you want your business to be a success now and evolve into a more successful (and profitable) enterprise in the months, and years, and decades to come.
Why wait for the disruptions to occur? What if you could anticipate exactly what disruptions are likely to affect your business and plan for them in advance?
That is exactly what you can and should do!
Let’s discuss a logical approach to meet this objective, first by addressing how you can eliminate or substantially reduce the risks, and then by addressing the protections you can put in place in the event a remaining risk does materialize.
Allow me to share about a previous client of my asset protection firm, Sollertis. This is one example that clearly illustrates the hidden risks that secretly lurk in the dark corners of your operation.
1. The Sticky Situation
I remember my first conversation with David (a fictitious name to protect client confidentiality). A former disgruntled employee had just sued him and it was a completely bogus claim. The employee, Peter, (a fictitious name to protect client confidentiality) was underperforming in his role and was doing other silly things that provided a good basis to terminate him for cause, which David did.
There was absolutely no reason for David to be concerned. After all, he was in the right. But David was concerned, very concerned.
He had just concluded a similar lawsuit where another disgruntled former employee who he had terminated for cause just as well had sued him. He expected that previous case to be resolved quickly and in his favor because the employee deserved to be fired. He hired an attorney who litigated the case for a year or more. All along, he expected to win.
After all of the evidence was submitted, David ultimately lost the case and had to pay hundreds of thousands of dollars to this former employee who lied and got away with it. On top of that, he had to pay hundreds of thousands of dollars in legal fees to his attorney.
2. The Client Problem
David was very upset with how that previous case came out and he was not about to take this new case lightly. He had heard about Sollertis from another client of ours and he made it very clear that his previous attorney was not aggressive and he needed us to be very aggressive. He did not want to sit back and just defend the case, he wanted to go on offense against the former employee who was now trying to extort money out of him after hearing how the other former employee had faired.
3. The Sollertis Solution
We got aggressive, as David demanded. We went on offense, and we crushed Peter, his former employee’s, credibility. We tracked down Peter’s ex-wife and others to secure testimony about other bad acts by this former employee.
In the end, after about one year of litigation, we settled the former employee Peter’s million-dollar claim for about $15,000, barely enough to cover his costs. We could have taken the case to trial and got a defense verdict, but David felt this was a bad enough defeat that the word would spread to his other employees (100 of them) and they would know that any further attempts to extort money out of him, especially after screwing up on the job and getting fired for cause, would not end well. The message got around to the other employees, and David reasonably believed that the risk of any further lawsuits was substantially minimized.
This was a good strategy that we helped David deploy, but it was not cheap. A year of aggressive litigation, where we didn’t just defend but also attacked, cost him around $125,000.
Here is where we were able to turn a good strategy into a great strategy.
David has turnover of about 5 employees per year. As we frequently say at Sollertis, there is a cost to hire and there is a cost to fire. But $125,000 is a lot of cost! So going forward we took some additional steps to further minimize the risk.
First, we conducted an audit of David’s employment practices, helping him to update those practices to fully comply with both Federal and State law.
Second, we implemented a new policy that for each employee that separates from the company, whether for cause or not, we will get their signature on a Severance Agreement and Release. Even if David has to pay each one of them a few thousand dollars, this is way less expensive than defending a bogus wrongful termination lawsuit. Because we had successfully defended the most recent employment lawsuit, and because word of that victory spread to the other employees, it was reasonable for us to expect that any departing employee would be quick to accept the severance pay and sign the agreement releasing David’s company from liability for all claims.
This is a great example of how you can substantially reduce, if not eliminate, employment claims, which are for many businesses the most common risk they face. Not everyone has to go through the lawsuit. It depends on where you are in your relationship with your labor force, and so many other factors such as the type of business you operate, and the type of work that your employees do.
At the very least, you can audit your employment practices, make any necessary changes, and start giving every employee a little cash on the way out the door in exchange for a release of claims. After all, those departing employees are about to go through a very uncertain time and giving them an extra week or two of cash can really ease the transition and promote good will for your company, even if the employee deserved to get fired.
It’s not personal and it’s not emotional, it’s just good business.
In David’s situation, he took a risk that was costing him on average hundreds of thousands of dollars each year and turned it into a relatively certain expense of about $25,000 each year that he could build into his budget.
Of course, there are a lot of risks besides just labor law claims. We can analyze your business and develop strategies to eliminate or reduce those risks as well. For instance, we had one client who had multiple lines of business but it was just one of those lines that was causing all of the lawsuits. We decided to take the money they were spending on the lawsuits and use it to market the other lines. With the increased sales in those other lines, we were able to shut down the line that was causing the losses and thereby completely eliminate that particular risk.
There are many other types of risk that we have been able to help our clients minimize or eliminate and I’m sure if we looked carefully at your business, we would be able to develop similar strategies.
So, the first step is to minimize or eliminate the risks in your business. Now let’s take a look at the second step you can take to stack the deck in your favor: putting protections in place in the event a risk does materialize. After all, looking again at David’s situation, although he can substantially reduce the risk of employment claims, as long as he has employees he is unable to eliminate that risk.
ASSET PROTECTION FOR BUSINESS OWNERS
All asset protection is going to start with a review of your business practices, existing entities and trusts, an inventory of all of your assets and liabilities, learning about the trusted advisors who are already on your team (CPAs, financial advisors, insurance brokers, attorneys, etc.), and understanding your family situation (spouse/children), retirement plans and dreams, and risk tolerance. During this discovery and planning phase we will use what we learn to develop your personal Master Asset Protection Plan, which is a comprehensive plan for the growth and protection of your wealth.
For all clients, this plan will include one or more asset protection trusts, limited partnerships and limited liability companies, with particular attention spent determining the best jurisdictions in which to create these asset protection tools.
Asset protection is very unique to each person, but there are some similarities between members of certain industries. For instance, manufacturers face very similar risks as do transportation companies. With that said, let’s take a look at some of the basic asset protection tools for all business owners.
There are three basic asset protection strategies that are generally available to protect all business owners from the risks they face. These tools include building the wall, segregating the business assets, and retirement planning. Let’s take a look at each of these.
1. Build The Wall
This really is quite simple. Your business generates profits. You take the profits out of your business and you invest them. These investments typically include a residence, investment real property, equities and bonds, and other business investments. We will refer to these investments as your Investment Assets. We want to build a wall between your business, where you face the most risk, and your Investment Assets. To do this, we use asset protection trusts and entities. With the wall in place, your Investment Assets are protected from the creditors of your business.
2. Segregate The Business Assets
Often times, a business will have two or three assets that are much more valuable than the others. These are typically the most important assets than are essential to the business and that you would want to take with you if you were to start your business over. We will refer to these assets as your Business Assets. Examples of these most valuable Business Assets may include intellectual property, a business real property that you own, for example, an office building where you conduct your business, and expensive vehicles, equipment or machinery.
We want to LEGALLY separate these valuable Business Assets from your business – they will still be used by your business but they will not be a LEGAL part of your business.
Let’s start with intellectual property. If your business owns valuable intellectual property, we would like to see this IP owned and registered to a separate limited liability company. The LLC will then license your business to use that IP and in exchange for this use, your business will pay a royalty to the LLC. By structuring the ownership of your IP in this fashion, we have removed it as an asset of your business and therefore, the creditors of your business cannot take your IP from you.
And who owns this new LLC? You got it – a trust or entity that you own, which is ON THE OTHER SIDE OF THE WALL!
An example of valuable intellectual property would be Coca Cola-Cola’s secret recipe. That is an asset so important to Coca-Cola that if they were to suffer a devastating loss that crippled their business and they were to bankrupt their corporation, they would not want their recipe to be part of that bankruptcy. Instead, they would want that recipe to be owned by a separate entity on the other side of the wall, an entity that could license that recipe to a different business, or a new corporation, if it became necessary to do so
Another common valuable asset of a business is real property. If your business owns valuable real property, we would like to see this real property owned by a separate limited liability company. The LLC would then lease that real estate to your business in exchange for rent that would be paid by your business to the LLC. Again, who would own this new LLC? You got it … a trust or entity that you own THAT IS ON THE OTHER SIDE OF THE WALL!
We would want to implement this same strategy for any other valuable Business Assets used in your business such as vehicles, equipment and machinery with the end result being that they are no longer assets of your business and therefore, cannot be taken by your creditors in the event any of the above risks we discussed were to occur.
An example of this strategy would be a manufacturing company. If that company were to suffer a grave loss and be forced to file a business bankruptcy, we would want to know that the manufacturing machinery, probably valued at millions of dollars, would not be included in that bankruptcy because it is owned by a separate entity on the other side of the wall and was simply being leased by your business. We have had other clients who have had expensive work trucks and vehicles, expensive heavy equipment, and expensive medical, surgical or other equipment, for all of which a similar strategy can be deployed.
Another collateral benefit from segregating Business Assets from your business is that your CPA will have more tools available to reduce your income tax.
3. Retirement Planning
The State of California has certain assets that it mandates are exempt from attachment by your creditors and when we use these exemptions to protect our clients’ assets we refer to this as exemption planning.
The most common type of exemption planning that we use to protect assets is retirement plans. You may already have a retirement plan in place for you and your employees, but it will probably be too expensive to use this plan to protect your assets.
What you probably do not know is that you can create a private retirement plan under CA law that does not require you to allow your employees to participate. With a private retirement plan, you can protect much more of your wealth, but the rules are complex, and there are certainly situations in which private retirement plans will not protect your assets.
In fact, a case was just handed down by the courts last year where a doctor’s assets in a private retirement plan were ruled to not be fully protected from his creditors. So, it’s important that you have your plan created by competent legal counsel to ensure it will protect your assets as intended.
These are just some of the many asset protection tools available to business owners.
Asset protection is like insurance; it doesn’t work unless you have it in place before the claim. So, don’t wait until it is too late to protect.
You work very hard and have so for many, many years to build your wealth. Stack the deck in your favor by protecting yourself now. Take the time to have a conversion with Sollertis today. Start by visiting us online at Sollertis.com.
This material has been prepared by Sollertis for informational purposes only and nothing herein is intended as legal advice for any particular or individual situation. You should not rely upon any information herein as a source of legal advice, and receipt of any such information does not create an attorney-client relationship between you and Sollertis. Viewers and readers should not act upon this information without seeking professional legal counsel. Prior results do not guarantee a similar outcome.