The Asset Protection Strategy Every Owner Needs to Know

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Disclaimer: The following information was provided by Larry Oxenham and the American Society for Asset Protection. Acting on this information has legal, financial, business, tax and personal ramifications. Before acting on any portion of the information contained within this post, contact the American Society for Asset Protection, or an attorney or accountant. Nightclub & Bar and its parent company Questex are not a law firm and this post does not constitute legal or accounting advice.

There’s a lot of fun to be had owning, operating, managing and working at a bar, nightclub or restaurant. If an owner plays the game right, the pros—being their own boss, financial security, overcoming challenges in creative ways, being recognized as an expert in the industry, living their dream (to name but a few)—outweigh the cons.

A leviathan of a financial drawback is among those cons, though. One lawsuit can cost an owner everything. Not just the business, not just the freedom of being their own boss, not just the humiliation of being forced to close their doors forever for a one legal misstep. A single lawsuit has the very real potential to rear its ugly, monstrous head and take an owner’s home, car or cars, and all their assets. Just one lawsuit can take everything.

It’s imperative that bar, restaurant and nightclub owners understand asset protection. It’s not the sexy side of the bar business (for most), but it deserves undivided attention. Larry Oxenham, senior advisor at the American Society for Asset Protection (ASAP), addressed asset protection during a fast-paced and informative 2019 Nightclub & Bar Show session to provide owners security and financial peace of mind.

“Most of you in this room are just one bad judge’s decision away from starting over,” said Oxenham to those who attended his educational session. “Do you realize every one of you has already made the decision as to what’ll happen if you go to court? Because whatever documents you’ve already signed or haven’t signed, that’s what they’re going to use. So, there’s no excuse ever for building a business without making sure you’re taking care of yourself.”

Oxenham and ASAP have been speaking with businesses and groups about asset protection since about 1975. The first lawsuit that dealt with asset protection was litigated in 1961 in South Dakota. The attorney who won that case is the one who created the strategies Oxenham shared with Nightclub & Bar Show attendees.

Marriott Hotels, the Yankees, Oprah Winfrey and Arnold Schwarzenegger are just a few of ASAP’s clients who have benefitted from these asset protection strategies. One important note, these legal strategies are specific to the United States.

According to the American Society for Asset Protection website, over 100 million lawsuits are pending right now in the United States. A new lawsuit is thought to be filed every 30 seconds. This makes total asset protection necessary for owners in this industry because the odds they’ll never facing a lawsuit are slim.

Read this: How to Protect Your Assets

The great thing is that the American Society for Asset Protection’s strategies aren’t nearly as difficult as people assume. In fact, Oxenham claims they’re much simpler than managing employees, inventories or guests. The issue is that the average operator—any non-attorney, really—isn’t taught or trained legal strategies. As he puts it, “Have any of you ever gone into your attorney’s office and walked out smarter than you went in?”

In Oxenham’s experience, the greatest difficulty that owners encounter is setting up their legal entities correctly from the start and maintaining them properly. Without doing so, an owner can’t be sure they’ll survive a lawsuit, their wealth will move on to their beneficiaries in a timely manner upon their death (only 7 percent of Americans have a financial plan in place for their deaths), or that they can even sell their business for maximum profit.

Corporate Structure

When it comes to business entities that can be created, Oxenham wants owners to understand something simple about the difference between C corporations and S corporations. C Corporations have existed in the United States for more than 200 years whereas S corporations are about 50 years old. Many accountants or professors will tell people that small businesses are S corporations. However, C corporations have “light years more tax advantages over” any other type of corporations. In contrast, S corporations have only been around for about 50 years.

There’s also the LLC, the limited-liability corporation. These have become so prevalent that Oxenham says you can order one with your latte at Starbucks. The problem with the LLC is that people create them thinking that doing so will protect their assets. That’s simply not how it works, according to Oxenham. He says that LLCs were created in 1996 to solve partnership problems that can arise in S corporations. However, only 7 states in the US have case law that protect LLCs. That means it’s up to the judge in every other state.

Worse yet, Oxenham says that if operators who created an “off-the-shelf” LLC look at their documents—usually in the 2 series paragraphs—they’ll find a clause that guarantees they’ll lose in court. The paragraph that dooms an owner who has created an LLC via DIY documents or accountants or lawyers unfamiliar with the best way to structure one contains two dangerous words: “mandatory distribution,” which means that every year they must distribute all the money in the corporation.

Oxenham and ASAP’s strategy accomplishes a few things. One, it provides owners with all the benefits of a C corporation without ever having to create one. Two, it eliminates the incentive—money—for attorneys to file lawsuits against an owner’s company. Three, it provides peace of mind.

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Marriot Hotels, as mentioned earlier, uses ASAP’s strategies. Doing so allows them to operate hotels in all 50 states with confidence. The strategy allows them to predict what would happen legally if they were slapped with a lawsuit in any state.

The New York Yankees have also implemented the American Society for Asset Protection’s strategies. As Oxenham explains, about 50,000 people can attend a Yankees game. That means the Yankees face the potential liability of 50,000 people drinking beer at a stadium they operate. And yet they do so with confidence.

Corporation States

Oxenham and the American Society for Asset Protection’s overall goal is simple: prevent lawsuits so a business owner never has to fight them. As he explains it, the strategy is the reason a multi-billion-dollar corporation like Marriott can operate in every state in America and not get sued every day. The reward for an attorney has been eliminated. Such companies can tell attorneys to go ahead and search public records because what they’ll find will make them want to forget about filing a lawsuit against them.

The ASAP strategy makes use of corporation states, also referred to as corporate havens. There are four corporation states in America: Alaska, Delaware, Nevada and Wyoming. ASAP no longer files corporations in Delaware because the state favors companies worth $500 million or more. The state also requires too much disclosure and costs more than Oxenham likes.

Instead, ASAP focuses on Alaska, Nevada and Wyoming. One reason is that those allow resident agents, a responsible third party that resides in a state in which a business operates and who can receive lawsuit notifications and tax forms. Alaska, says Oxenham, is currently a little bit ahead of Nevada in terms of being an ideal corporation state.

To illustrate the importance of corporation states, Oxenham says that 60 percent of Fortune 500 companies have a Delaware headquarters. Ninety percent of U.S. Fortune 100 companies are headquartered in Nevada. The Silver State is where Oxenham’s corporation is headquartered as well.

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If someone wants to sue Larry Oxenham and ASAP, they would retain an attorney. Their attorney would contact the Secretary of State’s office in Nevada and confirm his corporation is indeed headquartered in the state. However, Larry Oxenham doesn’t reside in Nevada and therefore doesn’t exist there. That doesn’t mean the issue is dead, as Nevada (and the state of Alaska) would inform the attorney that they’re free to pursue the lawsuit. If they win, however, they’ll get nothing that belongs to Oxenham, except his tax bill if there is one. That’s because the IRS decided in 1977 that the creditor (the person who sued and won) must pay income tax, even if no income is distributed through the partnership or LLC. As Oxenham says, this is how corporations like Marriott remain in business.

Oxenham further explains that a well-crafted LLC is afforded great protection in a lawsuit because of what’s called a “charging order.” The provisions that accompany a charging order if a well-structured corporation receives a guilty verdict in a lawsuit deter attorneys from wanting to file a lawsuit against it, according to Oxenham. That’s because a person who sues a company using the ASAP strategy is never allowed to touch the owner’s personal assets in all 50 states.

Case Study

A dentist in Indiana was frustrated with the amount of money he was paying in taxes. The dentist had initially set up an S corporation and owned the two-story business in downtown Indianapolis where his practice was located. Other specialists had their offices in the dentist’s very valuable building, meaning that every one of their clients was a liability.

The dentist filed his paperwork in Indiana because he lived and worked in that state. He had also inherited millions of dollars in precious metals, properties and other assets. Were the dentist ever sued, he knew the attorneys would go straight after his assets since they were worth millions of dollars. He would be ruined.

ASAP initially set up a limited partnership for the dentist in Indiana in 2008. At that time, that was the best strategy; they now use the management LLC. ASAP set up the company and filed its paperwork in Alaska. The corporate structure was as follows: 99 percent of ownership was under the dentist and his spouse’s names (as limited partners), and one percent was owned by general partners. In any agreement, the general partner carries all the liability.

If the dentist were to be sued, the attorney would learn that 99 percent of his equity was in Alaska as limited partners. If the attorney were to proceed with the lawsuit and win, he’d never get the dentist’s gold, silver, properties, or other assets, but he would get a tax bill if there were one. The next lawsuit for that attorney if they proceeded and won? Likely a malpractice suit filed by their client.

What ASAP didn’t do was get rid of the S corporation the dentist had set up before working with ASAP. Instead, they gave it a job: it manages the business. However, it doesn’t own anything—assets, for example—that could hurt the business (and therefore its owners) if a lawsuit were filed against it. The S corporation became an operating entity and just works for the management LLC that the American Society for Asset Protection had created for the dentist.

Read this: Survive & Avoid Lawsuits: 7 Must-Know Security Tips

As far as the tax benefits, the dentist was paying more than $30,000 in taxes each year prior to working with Oxenham and ASAP. To illustrate the value in adopting ASAP’s strategy, the team asked the dentist’s accountant to recalculate the dentist’s taxes from 2007 as if he were a C corporation. A benefit of forming a management LLC is that it’s taxed like a C corporation. Applied to his 2007 taxes, the dentist would have saved over $30,000. This is due to single member LLCs benefiting from “disregarded status” from the IRS, meaning it never has to file a tax return.

For this case study, bar, nightclub or restaurant owners should replace the dentist with themselves. They should then substitute their venue for the dental practice. Then, replace the two-story building that houses the dental practice with the building in which their bar, nightclub or restaurant is located (if they own the building). That’s how the case study applies to this industry.

The One Thing Every Business Owner Needs

If an owner thinks having a will guarantees that their wealth and business will move on to whomever they have designated, Oxenham says they should think again. In his professional opinion, wills should be renamed “attorney welfare.” This is because wills end up in probate and end up costing beneficiaries money. Attorneys draw out probate, making money until a judge makes a final decision regarding who receives what. Instead, Oxenham says every business owner should have—without exception—a revocable living trust.

As he explains it, such a trust is simple and effective. Basically, a revocable living trust “wants to know” but three things: Who are you, what’s the stuff, and who do you want to give the stuff to? This type of trust keeps a person’s estate private, doesn’t need to be filed, and doesn’t require a tax return. In most cities and states, revocable living trusts cost just $2,500 to $3,500, on average. That’s not a lot of money to bypass attorneys, probate court, and the chaos inherent to a will.

Speaking of wills, however, Oxenham instructs owners to ensure that their revocable living trust contains what’s called a “pour-over will.” This form of will is a last will and testament that acts like a net to catch any assets that aren’t transferred to or included in a revocable living trust. If an owner has a revocable living trust and sees that a pour-over will has not been included, Oxenham says they should fire their attorney.

Oxenham and ASAP are on a mission to protect business owners and their assets. Don’t be among the 93 percent of Americans who, according to Oxenham, have created a company and worked hard all their lives just to reward the IRS upon their deaths.

While Oxenham describes the ASAP asset protection strategy as simple, it’s recommended that business owners with questions or who want to restructure their companies contact them directly. The American Society for Asset Protection website can be accessed by clicking here.

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