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Last week, we dove deep into the Panama Papers – the scandal that's implicated dozens of world leaders and several big banks – and I told you that ordinary investors routinely use shell companies as a perfectly legal method of asset protection.
Many of you have asked just how you can use these advantageous structures to protect your assets from lawsuits, creditors… and just about everything else.
So today, I'm going to answer your best questions about how you can get in on the shell game.
Let's get started…
Q: You said last week that ordinary people can create shell companies to protect their assets. How would I go about setting up a shell company?
It's really easy…
The first thing to consider is where you should you establish your company. While you can go offshore to someplace like Bermuda, the Cayman Islands, or even Panama, which are all great destinations, the cost to establish an offshore entity and maintain it is too expensive and complicated for most U.S. citizens. Here in the United States some states have better corporate protection laws than others.
For example, Delaware is a preferred state because of its courts. The Delaware Courts website states:
The Delaware Court of Chancery is widely recognized as the nation's preeminent forum for the determination of disputes involving the internal affairs of the thousands upon thousands of Delaware corporations and other business entities through which a vast amount of the world's commercial affairs is conducted. Its unique competence in and exposure to issues of business law are unmatched.
Nevada and Florida are two other good states to establish a company. If your state is "friendly" to corporations and other entities, establish your company (or companies) there.
Establishing a company out of state can be more expensive and complicated.
I live in Florida, so I'd set up a company in Florida. In Florida you can do that online. The Florida Department of State Division of Corporations website has all the information you need to set up a company properly in Florida.
Other states have similar websites, and there are firms that offer set-up services for as little as $150, not including actual state filing fees. While you don't really need them if you're a do-it-yourselfer, check out what they offer, and as a first-timer you might want to have someone do everything for you and provide you with the operating agreement and IRS filings you'll need.
The preferred entity structure is a limited liability company, an LLC. Corporations are more complex and require more paperwork to maintain properly. So if you're looking to protect your assets, creating an LLC is the way to go. LLCs don't have shareholders and a board of directors like a corporation – they have members, and managers and managing members. You can be a single-member LLC, where you are the sole member and the manager. Or, you can be a member (who owns all the equity) and have someone else act as the manager. It's the manager's name that goes on the state filing documents, not the members. You can get more anonymous by establishing an LLC and making that LLC the manager of another LLC, so your name doesn't appear anywhere.
There are all kinds of ways to "hide" who you are, who the beneficial owner is – it's just a matter of how creative you want to get. But, for the most part, you don't have to get that deep into it to protect your assets.
Once you establish your LLC, with its operating agreement and other state-required paperwork (there are simple template operating agreements available online), you can put your home, your car, your boat, or whatever assets you want into it.
The catch is, you have to "convey" your property to the LLC properly, so that it legally owns the asset you want to protect.
Now, the easiest way to do that isn't to sell your property to the LLC (that will cost you in taxes, etc.), though there are ways to convey property that don't involve taxes (see a lawyer if you want to go that route) – it's to establish the LLC and then buy things in the company's name.
One of my LLCs just bought a car, so it owns the car, not me. I made an investment in the company – that's where it got the money to buy the car. It's perfectly legal and smart.
That's it. That's how easy it is to establish a shell company to hold your assets. Because it's important to understand what you're doing, why, and how to do it, I strongly suggest you do your homework – go online (all the basic information you need to know is there). And, of course, consult your lawyer and most importantly, a competent tax advisor.
By the way, most tax advisors aren't competent when it comes to structuring, asset protection, and the tax advantages shell companies offer. If they haven't done a lot of work in this area, move on.
Q: You mentioned that a shell company can protect my assets from lawsuits – can they also protect my assets from creditors?
Yes, in most circumstances.
There are laws about conveying your property to someone else or your own company (meaning the company you control) if you are moving assets out of creditors' reach after they are seeking to collect, repossess them, or have a judgement against you.
But if you have your assets in shell companies long before creditors come after you personally, they can't touch your company's assets because you don't own them – the company does.
As long as you've established the company properly, legally conveyed your assets into the company, maintained the company by keeping it registered and doing what's required to "manage" the company (that's why LLCs are better, there's not much you have to do paperwork-wise to keep them maintained, while corporations require a lot of meetings and paperwork), your assets will be protected.
However, there are ways creditors can attach your company's assets. If they can "pierce the corporate veil," they can get to your assets.
"Piercing the corporate veil" means that, in the event you do something wrong, creditors, lawyers, or the courts can strip away the veil that protects your assets and get to what's in the company. If you do everything right, you should enjoy impenetrable protection.
Of course, if you buy a house or car or whatever in your company's name and have a mortgage or loan on the property, you can't hide from those creditors because they will only lend you money if they can attach the property you're buying with their money.
Q: I have an extensive collection of art, jewelry, etc. – tangible assets. Are these things that I can place in a shell company?
Yes. You might want to place them in separate companies or group them together into several companies, depending on what kind of protection you want, and from whom. The primary reason you'd want to put them into a company is for asset protection from creditors who might come after you personally.
You can always get insurance on them inside a company.
Of course, without knowing your personal circumstances and what you're trying to achieve, it's hard to give you the best answer here.
A good asset protection lawyer or a really good accountant will be able to help you build the specific structure that's right for you – and your assets.
Q: What are the advantages of a shell company over other methods of asset protection, such as an irrevocable trust?
That's a good question. Unfortunately, the answer is quite complicated – a better question for a lawyer than a former hedge fund manager, I'm afraid.
Again, a good asset protection lawyer or trust attorney can better answer that question for you.
While they are essentially two different animals, and one might be better than the other for your specific needs, it's possible – and probably smart – to place your assets into an LLC, and then place the LLC in a trust.
Q: Are shell companies a better form of asset protection than insurance?
Insurance has nothing to do with putting your assets into an entity structure.
Take your car, for example. You have insurance on it. If you get in an accident with the car not in an entity structure, and you're sued for more than your insurance covers, you could be personally liable (which means you might have to sell other assets you own) and have to satisfy an unfriendly court judgement against you.
If the car was held in an entity structure and it was the only asset of the company, it would still be insured. In the event of an accident, the company can be sued, but that's unlikely because lawyers would see that the only asset it has is the car, so there's nothing else of value in the company to go after.
You could still be sued personally, but if your other assets are protected, there's nothing to sue you for. You're considered "judgement proof."
Having insurance on assets within a shell company is still a must.
Q: What are some other ways I can protect my assets?
Besides setting up trusts, which aren't as good as having shell company structures, besides, most trusts hold company shares, equity positions, and shell companies anyway, there aren't many other ways to protect your assets.
But, like I said, you can get creative with different layers of protection. Put your assets in an entity structure, and then place the structure in a trust. Make sure all your assets are insured. And talk to an asset protection lawyer to make sure everything is properly structured, conveyed, and maintained.
That's how rich people structure their lives – it's how they stay rich. It's perfectly legal and smart – and it's not just for the rich. Ordinary investors like you can take precisely the same measures to make sure you hang onto your assets.
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About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
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