Most people can benefit immensely by utilizing the Warbucks-Red, Inc. Strategy. The strategy is based on two very simply principles:
1.) The corporation is separate from its owner.
2.) That true asset protection can only occur when the incentive to sue is removed. Let's take a look at each of these points and then review the strategy to show you how everything works.
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.
"I am not the corporation and the corporation is not me"
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 half way 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. 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 of multi-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 attorneys 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, and you don't want to be poor that is why you own you own business. So you can have control over your 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 you might have the potential to reduce your taxes.
For purposes of this article we are going to call your home state business Red, Inc. We will call it that because red ink is what we hope to generate through this strategy. The other corporation in our example is going to be called Warbucks. Warbucks is a corporation that will be formed in Nevada to provide a service to your Red, Inc. business.
Let's say that your Red, 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, Red, Inc. would always be in debt, and if the payments aren't made, the bank can take everything Red, Inc. owns and pledged as collateral to re-pay the note. In essence Red, 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!
No, you can have your cake and eat it too. Why? Because if the lending company was your own Warbuck's 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 Red, 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 loose the lawsuit you are judgment proof because Warbucks is the bank. You have total control over it, and you decide what happens if Red, Inc. can't pay its interest, and you decide what happens if someone tries to take your assets from Red, Inc. Remember that Warbucks has the first lien on everything. Anybody trying to get at the assets of Red, Inc. must pay Warbucks off first.
There's one more little detail we need to cover here, and that is paying interest on the loan made from Warbucks. 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 Red, Inc.'s home state. But, if Warbucks were located in an income tax free state such as 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 Red, Inc. The other company will be a Nevada corporation which we have called Warbucks, Inc.
Red Inc. borrows money from Warbucks, and as a result goes into debt. Warbucks takes all of the assets of Red, 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. Red, Inc. pays interest to Warbucks, which reduces its state income tax, and Warbucks has a first position on the assets of Red, Inc., making it a very unattractive lawsuit target. That, in a nutshell, is the Warbucks – Red, Inc. strategy.
For a more detailed discussion of this exciting strategy, and other possibilities, contact us on-line or phone us toll free at 1-800-648-0966 and ask to speak with one of our top business strategists. Remember, knowledge is power, and power translates into money. The more you know, the less you owe!
All that we do is submitted and performed with the understanding that we are not engaged in rendering legal, accounting or other such professional service. If legal advice or other expert assistance is required, the services of a professional should be sought.