Editor's Note: The information presented in this article IS NOT TO BE TAKEN AS LEGAL ADVICE. The authors of this article are not practicing attorneys at law. Nothing herein is to be construed as legal advice from the authors of this article or the employees of this website. Seek formal guidance from an attorney registered to practice in the state in which you operate. Corporate law varies state by state.
The authors are sharing their understanding of the pros and cons of various types of business structures and strategies for legally protecting your hard-earned assets. Some of the tips and advice presented is going to be slightly off depending on the state in which you operate and the present status of the U.S. tax laws and judicial system. The intent is to provide you some ideas to consider and to investigate via the proper experts (attorneys and CPAs).
WARNING REPEATED: Consult a licensed practicing attorney before taking any actions upon the suggestions shared in this article.
Protecting Your Assets
For most business owners, the type and number of corporations they should be using to run their business doesn't draw sufficient attention until AFTER their assets come under fire. By then, the game is lost.
You MUST set up your asset protection long before a threat arrives. The first priority for new business owners is getting going. What usually happens is the owner dumps everything into a single incorporated business.
Something goes wrong; the business comes under fire; it gets handcuffed by litigation; and the owner is prevented from generating income.
If the assets are properly protected, the owner may be able to generate income with the assets that aren't being attacked and use the money to fend off the attack on the impaired assets. Otherwise, the owner is probably hosed.
Common Asset Threats
At some point in time, your business is likely to face one or more of six common threats.
- Financial stress
- Divorce (it had to be said)
- Stockholder death
- Tax liens
We would like to address unionization as to avoid confusion about our position on construction unions.
We are neither biased towards nor against construction unions. Signing up with the unions is often a great decision for an owner. And that's what it should be - the owner's choice.
As we understand the regulations (consult your attorney) the voting rules that were written for manufacturing apply to contractors as well. If 51% of your field employees vote to unionize, congratulations, you're now required to get your workers from the hall.
Such a sudden, unexpected rise in labor costs can put your company at great risk. If you have moved your hard assets into a separate company, you should have the ability to shut down your suddenly unionized operating company and open a completely new one. Then switch your leases around to rent your building and equipment to your new, non-union operating company. You could be back up and running within 24 hours.
Other Considerations & Benefits
Asset protection is not the only reason to thoroughly consider your corporate set up and to use multiple corporations to run your business.
- It is easier to value your business.
- It is easier to sell your business.
- It is easier to bring your investors.
For small construction companies, the business is usually worth the value of its assets.
The exception to that rule of thumb is where you have created a business that runs itself and you can prove it. The best proof is where you've opened branch offices in other cities that are as profitable as the home office (i.e. franchises).
If you haven't successfully set up a self-running business, the only people who are apt to offer you more than twice the annual net are your employees and a national roll-up. Neither of which is very likely.