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it's important to set up a legal entity for your business so your personal assets are not at risk if your business gets sued in this video I will explain why as entrepreneurs we're often told to think big and move fast thinking big is important to success but moving too fast can often be dangerous especially in the beginning many new entrepreneurs jump into their business way too quickly overlooked important details and then they make costly financial and legal mistakes these mistakes could seriously jeopardize the long-term success of your business the biggest newbie mistake is not setting up a legal entity for your business if you don't create a legal entity the law will view your business as a sole proprietorship there's one owner or a partnership if there are two or more owners both the sole proprietorship and a partnership leave your personal assets exposed if a sole proprietorship or partnership is sued the owner's personal assets like their home cars bank accounts etc are at risk of being used to settle business debts and liabilities so what are the options you have for setting up a legal entity the most common legal entities that people know of are LLC's and corporations but before we get into details it's important to first understand their foundation let's discuss what a legal entity really is a legal entity is the same thing as a business entity and we're going to jump back and forth between the two terms in order for this discussion to make more sense in the eyes of the law a business entity is a legal person in the eyes of the law you and I are natural persons a natural person is a living breathing human being that functions independently and makes decisions on their own a legal person only functions through the work and actions of natural persons acting on its behalf a legal person is considered by law a separate and distinct person from its owners this separation creates a protective wall between your assets and the assets of the business therefore this keeps your personal assets safe if your business was to be sued think of a natural person as a regular human being like you and I think of a legal person as a corporation like Microsoft or IBM or even companies like your local grocery store or bike shop although a business entity is not an actual living breathing person it still shares many of the same rights and responsibilities as you and I do it can make money you can own property like real estate boats aircraft and turn into contracts and agreements open bank accounts it can sue and be sued and pay taxes basically the only thing a legal entity can't do is vote in an election run for political office or do laundry by setting up a legal entity you are creating a business organization that can interface with customers clients vendors and more and most importantly by setting up a legal entity you are keeping your personal assets safe in the event of a lawsuit creditors can only go after the assets of the legal entity and that's all they can get they cannot get to your personal assets personal liability protection is the number one reason that people set up business entities the two main types of business entities that people form our LLC's and corporations we compare these entities in more details in our LLC versus corporation versus sole proprietorship video
Thanks for your comment Arnette Iwanyszyn, have a nice day.
- Fletcher Slevin, Staff Member
hi Clint Kunz here with Anderson business advisors and in this video I'm going to discuss the single-member limited liability company and asset protection you know there's a lot of internet talk out there about single member LLC's not providing any protection that you do not have what is referred to as charging order protections I just met with a client the other day who sat down with me and said they talked to an attorney out of California and the attorney said well if you're creating an LLC in Washington you have to make sure that it's set up this way otherwise you will not have charging order protections now if you're not familiar with what charging order protections are well it comes down to this if you get sued as an individual and you have a limited liability company set up here okay so here's my LLC and it has a piece of property in there let's assume i generate $12,000 a year positive cash flow on this LLC i am the member of this limited liability company if a creditor over here all right let's draw our creditor in this pitchfork is horns he comes after me and he sues me and he gets a judgment against me for $100,000 well what can he take from me well anything that's in my personal name maybe my house they could put a lien on my house if they wanted my car they could take my my car there but assets held in LLC's that's a little different can they take my limited liability company from me now many people will tell you on the internet well actually not many there are people out there will tell you on the internet that single member LLC's can be taken that your creditor can walk in and say alright this LLC is now my LLC to the extent that you owe me $100,000 now that information what they're referring to there is a foreclosure action that they're gonna foreclose on your LLC and the reason why we created the LLC in the first place is that we wanted to ensure that our asset in here is protected from our liabilities and we're protected out here from our assets liability so if something happens on the inside of the box it stays on the inside of the box the other thing I tell people if it happens on the outside of the box it stays on the outside of the box so when you're told that a single-member LLC does not have charging order protect that information is somewhat accurate what I mean by somewhat accurate is that it depends on the state law not all state laws are crafted equally so you have to understand where you're creating your entity is important for example let's take California for instance if I set up this LLC this way in California and I made the 12 K and my judge tells me hey we're gonna put a charging order on your LLC and with that what he's informing me is that if I take out the $12,000 is the distribution to Clint I gotta pay to my creditor until I've paid off this full $100,000 that's what a charge earner protected entity is that if somebody puts a charging order on your interest they can't take your LLC from you if you pull the cash out you got to give it over to your creditor now if they tell you that it does not have charging order protections what they're telling you then is that if this does not happen if they don't get paid out because of course if it's my LLC and the judge tells me I got to pay any distributions over to my creditor I'm not taking distributions I'm keeping all the money in there what I'm gonna do is rather than take distributions I'm gonna take out a loan to myself right you can do that or heck I managed it why don't I just pay a management fee to myself out of my LLC none of these are distributions and that's gonna frustrate your creditor because they're not getting paid so in states such as California if that charging order does not pay out then they can foreclose on your interest they can come in and take this LLC from you and give it to your creditor they could what they do is sell it to the highest bidder and then the creditor would get paid up to $100,000 so when they say it does not offer charging order protections what they really mean is that the state law provides that a creditor can foreclose on your interest okay now whether or not a creditor can foreclose on your interest depends as I stated on state law so this multi-member stuff that you hear a lot of people talk about oh it needs to be a multi-member LLC in order to have charging order protections that's not relevant in many statutes all it comes down to is this if I had say three members inside of here and this law allows foreclosure against the members interest although new is foreclosed on this members interest not the other two members there so having multiple members isn't necessarily going to provide you more protection if the state law provides foreclosure is a remedy so when I hear people say well I have to have multiple members in my LLC in order to make sure I have these charging order protections here and a creditor can't foreclose you're fooling yourself it depends on your state law that's why you need to know what what your state statute reads let's say South Carolina South Carolina for instance specifically provides for foreclosure in their statutes so if somebody came after you they could just take your interest so when you're creating an LLC what you want to look for is you want to make sure any interest you're holding personally has charging order protections and more importantly you would like to see the statute read that the charging order is the exclusive remedy available so oftentimes you've seen me do this many times the way we accomplish that with our structures is rather than set up your LLC and in a state that may be questionable or is downright weak like California what we'll do is we'll create these structures your LLC's to hold your assets in any state where the property is located so this could be Florida South Carolina California and then we're gonna create a holding LLC down here and this is gonna be in Wyoming this will be your Wyoming LLC just like that and then you can be a single member in that LLC and it's fine because Wyoming statute reads that the charging order is the exclusive remedy available to a creditor and it doesn't matter if this is a single-member LLC or multi-member LLC so they just kind of kill that whole argument right away now if you're wondering where what is the backstory where this argument came from there was a case in Florida a number of years ago called the Olmstead decision and what an individual had created an LLC there it got a judgment against him personally from the federal government they came after him and they ended up getting the LLC and what troubled so many practitioners after the Olmstead decision was that the Florida Supreme Court basically obliterated the statute they said well it the statute reads that the charge owner is the only remedy available well in this case only doesn't mean only it's only meant to protect when there's more than one member here we only have one member in an LLC and clearly the legislature didn't mean to protect one individual now when you listened to the oral argument it was baffling to hear this Florida Supreme Court even referred t
Thanks Thembisa3 your participation is very much appreciated
- Fletcher Slevin
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I've studied problem solving at Benjamin Franklin Institute of Technology in Boston and I am an expert in informatics. I usually feel lonely. My previous job was flight engineers I held this position for 2 years, I love talking about rail transport modeling and tree climbing. Huge fan of Matt Stonie I practice equestrian: jumping and collect records.
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