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50% of Business Owners & Investors Lose This Lawsuit
It’s hard to believe that 50% of business and real estate ventures are losing one of the most common legal attacks because they fail to protect against court decisions that pierce the veil. This means business and real estate venture owners are being held personally liable for lawsuits against their corporation, LP or LLC, and are vulnerable to losing their possessions.
Why is This Happening? How Can I Prevent It?
There are three reasons for this. We will cover the three problems creating this nationwide phenomenon, and what you can do to prevent it.
The timeless saying: “You get what you pay for” is forever true when it comes to forming a corporation, LP or LLC. If you are lured in by the sirens of cheap and quick you can easily run aground on the rocks of personal liability and huge damages.
A corporation, limited partnership (LP) or limited liability company (LLC), which we’ll call “entities,” are separate legal beings. They have a structure and a form. To completely shield you from personal liability these entities must follow the rules not only at the start, but every day you plan on them to protect you.
There are too many entity formation promoters on the internet who do not care about these rules. The sole goal is to separate your money from you. When their cheap and quick entity fails to protect you, resulting in you losing even more – much more – of your money, they will ignore you, rely on fine print and electronically disclaim any responsibility for your problem.
This is not the way to start out. You are taking an important step here – protecting yourself from future predators and claimants. You’ve got to do it right.
Let’s discuss the three main problems these cheap and quick promoters put you into, leading to a huge disservice to you.
Problem #1: Incomplete paperwork
You will see the offers for a $99 (or less) corporation. This entails filing the Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC) with the state. That’s all that is done in most cases.
Perhaps you are not told that you need bylaws, a registered agent, an operating agreement, minutes of the organizational meeting or the issuance of ownership certificates, among other requirements called corporate formalities.
The problem is that by not following the corporate formalities you open yourself up to unlimited personal liability if your corporation or LLC gets sued. If you haven’t met all the corporate formalities, you can be held personally responsible for the corporation’s claim. That defeats the whole purpose of setting up your entity!
An entity exists largely to protect you from losing your personal possessions if the business is sued. The chart above illustrates what happens without the protection in place. If you set up and maintain the corporate formalities, there is a corporate veil, that protects you.
Clearly too many people, perhaps unknowingly, are not following the corporate formalities. The goal of our company is to never let this happen to you. Of course, we can only do so much. If you fail to prepare annual minutes, or don’t pay the annual filing fee to the state, that is on you. Your corporate veil is going to be pierced due to your own negligence. But if you want initial and ongoing protection, we will certainly help you.
Will this cost you a bit more than $99? Yes, but not that much more. And when compared to with the consequences of losing all protection, it is not that much more at all.
A second scenario occurs with the $99 formation. Promoters use it as a come on to get you to pay inordinately high fees for the later required documents. This happens all the time. You pay $99 for your organizational documents to be filed with the state. Then the promoter tells you that another $1,500 is required to complete the formation package.
Whereas our full service firm, Corporate Direct (1-800-600-1760), charges $795 (plus state filing fees) for the complete package (which includes telephone support and the first year of registered agent services). You are being charged $1600 for a similar service by the ‘discount’ company. Beware of the bait and switch.
Problem #2: Registered Agent Breakdowns
One of the key corporate formalities you must follow is to have a registered agent. This person or company (also known as a resident agent) represents you in the state you used to organize in and any state you qualify in.
So, for example, suppose you set up a Nevada corporation and want to do business in California.
You ‘qualify’ the Nevada company to do business in California (we can further explain this simple process to you over the phone). As such, you will need a registered agent in both Nevada, the state of organization, and California, the state where you are conducting operations.
The purpose of the registered agent is to accept any service of process (i.e. lawsuits) and governmental notices on your company’s behalf. If you don’t receive these notices bad things can happen. In a lawsuit scenario you can lose the case via a default judgment for failing to answer the complaint.
So it is very important that you have a reputable registered agent who appreciates the importance of quickly getting documents right to you. In most states you only have 30 days (in Nevada it is only 20!) to answer the lawsuit. You need immediate notice because you have to get to work on defending yourself.
Like with the initial discussion of incomplete paperwork, we have two scenarios at work with registered agent breakdowns. First, we have no service offered and second we have inordinately expensive services offered.
Both can lead to the high cost of cheap corporations.
If the discount provider does not offer a registered agent service you may never know you need it.
You can be held personally liable for failing to have a registered agent.
Because many of these discount providers may not be around in several years (or months) there can be a gap in registered agent services. This breakdown can again lead to your personal liability. You are much better off dealing with an established firm (like ours, with over 28 years’ experience) that
will maintain your corporate veil and immediately contact you if there is a pressing issue like a lawsuit.
The second high cost is one of real expense. Like the previous bait and switch scenario where the $99 come on results in $1500 or more in fees, the same occurs with registered agent services. One example is where the first 6 months is free, but then you are billed every six months for a total of $350 a year.
Even worse, some providers misrepresent the law by saying that a registered agent must include a full office set up for $3000 a year. (There is no such law!)
Our firm provides its registered agent services for $125 per year. Corporate Direct includes the first year’s registered agent fee as part of the $795 initial package price. After that, it is just $125 per year which, of course, is a business write off.
We provide services in all 50 states. We will not hound you with unneeded services or solicitations. And we will provide you with a prompt notice of any matter. Registered agent services should be a steady and affordable transaction. Beware of cheap and quick promoters who veer outside the guard rails.
Problem #3: Poorly Drafted Operating Agreements
The LLC is now the most popular entity to use. The reasons are many. You can choose your taxation, so that you can be taxed as a partnership, S Corporation, C Corporation or disregarded entity. No other entity offers such flexibility. You have excellent asset protection via the charging order, especially in the states of Wyoming and Nevada. And the LLC allows for maximum flexibility in drafting the operating agreement (known as the Company Agreement in Texas), which is the entity’s roadmap for operations.
The problem is that many discount promoters ignore the importance and potential of the Operating Agreement (“OA”). As discussed in the section on Incomplete Paperwork, many of them don’t even provide this important document. Those that do offer only a skeleton version that will not completely protect you.
For example, some of the internet’s largest formation firms offer an OA that is extremely incomplete – just four to six pages long in some cases. (Ours is 30 pages.) A key failing of their very short OA is they allow for the free transfer ability of membership (ownership) interests within the LLC. This is contrary to one of the most important features of the LLC – the ability to keep unwanted potential owners out.
Here’s what all that might mean to you… Suppose you have an LLC with another friend and you are 50/50 members (owners). If your friend gets sued, you obviously want to keep the attacker out of your LLC. If the attacker wins a lawsuit and gains control of those shares, there will be all sorts of havoc wrought.
As a new 50% owner he can block any of your moves. He can try and force a sale of the company to get paid the money your friend owes him. Your LLC becomes a nightmare.
What’s scary is that many of the internet’s “reputable” entity formation firms actually allow for this chaos. It’s sickening.
Their OAs do not protect the owners by restricting the transfer of membership interests to unwelcome outsiders. By contrast, our OA does protect the owners to the fullest extent possible.
Is it worth an extra $100? You decide.
The irony is that when you compare our services – apples to apples (not oranges to apples given all the come ons and hidden fees) – our prices are very comparable.
But we won’t provide you with a cheap corporation. Instead, as is our goal, we will provide you with an entity that is formed properly from Day 1, with ongoing support to ensure you are following the ongoing rules for protection. It is your choice!
Form Your Entity Correctly
I hope this article has made you aware of the enormously high cost, and danger, of trying to form your entity using “cheap” solutions. As we discussed, they are a terrible idea for two reasons:
- You do not receive the protection you need
- They’ll attempt to bait and switch you so if you do opt for more protection, you’ll end up paying roughly double what we charge for the same services.
We have been creating and maintaining entities for our clients for over 30 years. You can trust us to help you set up correctly and maintain a sound asset protection structure.
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