However I am very afraid about frivolous lawsuits and legal/regulatofy expenses that many C corps (and others) face in the USA.
What are my options for protecting myself and limiting expenses and risk?
Thanks!
However, depending on how much your company is making, if it is a LOT of money, you can structure your companies.
Corporations are legal fictions and given a limited legal personhood. That is why you can open up a bank account in the name of a corporation, but you can't open up a bank account the name of your chair that you're sitting on. The corporation has legal rights and responsibilities.
Each corporation is a separate legal person. So, there are many companies that will open up multiple corporations to defend their assets. For example, I know of someone who has a business in a high-liability industry. What he does is that one corporation owns all the real estate and automobiles and trucks. Another company owns all the fixtures and inventory. The third company, which is the actual business that is customer facing, owns nothing. Except for some money in the bank account, of course, to make miscellaneous purchases.
The customer-facing business then leases the space from the real estate company. It leases all the fixtures and inventory from the second company. And pays them both, just as if they are separate companies....which they are!!
So, if someone sues the customer-facing company, that is fine, they have nothing to sue for. There are no major assets in that corporation. So there might be $20,000 in it or something small amount like that. A person can't sue either of the other two companies, or, at least, it would be MUCH harder, and lawyers would probably would not work on contingency fees. He lives in a smallish city and all the lawyers know him and will not touch any case against him, unless the suing client pays up front. Because all the lawyers know about his corporate structure.
I lease my office from a company, and they have 3500 offices around the world, and each is a separate corporation. So that each is individual. Movie companies are famous for this. They set each movie up as a separate corporation. This is the main reasons that movies never show any profits. And if an actor agrees to x% of the profits of a movie, the actor will never get paid anything. Which is why the actor should always agree to a percentage of the gross.
Of course, there are very important concepts, like making sure there's no alter ego or being able to pierce the corporate veil, but that's a whole other issue.
Finally, you always want to carry the appropriate insurances. That will also cover you to a major extent, and the insurance company's lawyers will defend you for free, which is a super huge deal. Unless you go over the limits of coverage, or course. And all kinds of business insurance is available, you should be very aware. For example, just a few months ago, I talked to a business owner who was sued for employee discrimination and harassment, false firing and all kinds of crap. He paid for it out of his pocket, but went broke after $75,000, and kind of just got depressed and gave up. As a result, the person suing got an award for $1.2 million. I asked why he didn't have Employment Practices Liability Insurance (EPLI), and he said he didn't know what it was. I said it protects a company from those harassment lawsuits, and the insurance company pays all the defense (which can go over $150K, just to prepare the legal case, not even including going to court. And it also covers any awards to the person suing, up to an amount that the business owner chooses (the higher the insurance amount, the higher the premium payments)
Of course, a corporation's main value is that it protects the owner's personal assets from people who sue. HOWEVER, it will NOT protect you unless you follow corporation rules. If you co-mingle funds, for example (write company checks for your personal use - ie pay for child's private school tuition), and other things like that, the courts will decide that it is NOT a corporation and your personal assets will come into play. This is called piercing the corporate veil. So as an owner, you wear 2 hats. One is the shareholder, the other completely separate function is a CEO. They are not the same, and one must treat each one differently. For example, Mark Zuckerburg does not write corporate checks from Facebook to pay for personal use. Tim Cook of Apple does not either. Can't do it. The only way to do it is to have a meeting of the board of directors, pass a resolution by the board of directors, put it in the corporate record book, and THEN can give the CEO extra money to buy a car or boat or whatever. Even if you are both the chair of the board and CEO, you must keep those functions separate. You must have an actual board of directors meeting somewhere. Not a fake one. And record it on a piece of paper.
One other important aspect. Depending on the situation, if you expect to make a lot of money, it is best to have corporation in a non-taxed state. I am in California, and the tax rate is, like, 10% for state taxes. If you open another company in a state like Nevada, Wyoming, Texas, Washington State, South Dakota, your company will be taxed nothing. That's a huge advantage for you. You must be careful that this company in another state does NOT do the same thing as the company in your state, otherwise your state may put them together anyways. But, for example, Apple Computer has a finance company in Nevada. It is called Braeburn Capital (https://en.wikipedia.org/wiki/Braeburn_Capital). it has 237 BILLION dollars in the company as of 2018. That company does finance, so totally unrelated to computers, therefore not the same industry. When Apple makes money, they pay the Nevada corporation and totally avoid California taxes, which has been probably billions of tax savings over the years. And, of course, any interest income that Braeburn invests in will be in Nevada, so again no California taxes on any investments, which if they were in California, they would have to pay taxes on that, too, when realized.
Of course, many companies also incorporate overseas, in various places like Panama, Grand Caymans, Ireland, etc. The foreign company then will own all the IP (intellectual property) to which the USA company pays to use the IP. This can get all the income out of the USA, because really, who puts the value on IP? It's made up. So it shows up as an expense on the USA corporation and drains the profit out of a corporation, and the corporation in the Bahamas or wherever does not charge any corporate taxes.
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This is really good on all this, because if you sue someone, you have to go to that jurisdiction. So if you live in San Diego, and a corporation is in Delaware, you have to fly across the country to sue in that jurisdiction.
Finally, Delaware is the state of choice for incorporating. This is for a lot of reasons, not just one. And there are reasons NOT to do this, too. Here are some of the pros and cons: https://www.legalzoom.com/articles/incorporating-in-delaware...
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And, of course....I'm not a lawyer, so talk to a lawyer if you have a substantial company. Which, now that I think of it, you probably don't, because otherwise, you would have talked to him or her about it, instead of asking about it here. :)
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Good luck!
Editing my comment:
Thanks again for the depth offered. I don't have any employees or physical products, so hopefully just Delaware or any other tax free state would be just fine.
I have personal assets in a few states and I am married, so I understand that if I just follow the strict rules of not mixing funds and operations then I will not have my personal assets seized on this technicality.
It sounds like the proper thing to do is make a lot of money and then incorporate. I don't mind paying the fees of a few grand, but that's actually just table stakes when compared to the cost of litigating a frivolous lawsuit like from a patent troll or people who make it their profession to sue businesses.
I have heard that even with insurance and being apart of groups that band together to prevent themselves from the brunt of these costs, it still costs tens of thousands of dollars to protect yourself from a default judgment.
I have a great business and great customers-- this legal risk does nothing but get in the way of that!
It's ok to make a lot of money and then incorporate, but if you already have customers and money, you might as well do it now. If your business is not complicated, then there are a lot of companies that will incorporate in any state for $50 (not including state filing fees - that cost depends on the state). https://www.swyftfilings.com/ A C corporation in California costs $49 for the Basic option. California state filing fee is $100, for a total of $149. So you don't have to pay a few grand to a lawyer in order to incorporate. Again, if it is an "easy" business, you can do it yourself. If you were building a nuclear power plant, you would want to get a lawyer to draw up the incorporation papers. I know you're not going to, but just giving an example.
Depending on your business and situation, you want to incorporate as soon as possible. The reason is that if you don't incorporate for 2 years, and you do something that someone can sue you for, then they can come after you personally. They could even sue you personally for all your stock in your company and take over your company, because you own the stocks personally. So that is a consideration. So if your company is making $20K per month, just incorporate. But even if your business is making $1000 a month, if you make a mistake that someone can sue for, if they win a $500,000 lawsuit, they will be able to garnish future wages, take away any future earnings until you pay the judgement.
Again, if you create different corporations, you can transfer all the very valuable assets to that company and put those assets beyond reach of any lawsuit. But, you should do it now. If you create a corporation after you are served with a lawsuit, the judge will see right through that and put those assets right back into the mix. So you put the company's assets in a separate corporation TODAY, and if someone sues you 5 years from now, that can cover you. So, for instance, you can start a marketing company up, that does all your marketing. If your company has a profit of $200,000, then you can pay marketing costs of $200,000 to the marketing company, and your main company has no money in it for anyone to sue you. But again, you can't do it last minute. You can start an internet company and have it create your website and pay them $200,000. You could start an IP company and license it's IP for $200,000 per year in order to get cash out of your company. Same thing for any other capital assets that you may own.
A much bigger threat than a patent troll is insurance. I don't know if you will have employees, but much more important to have EPLI insurance, for example. You should have E&O insurance, which insures you if you f-ck up. Like if an accountant totally flucks up a company because they made a huge mistake, and costs their client $750,000, you better have E&O insurance. Computer programmers, lawyers and others must have E&O.
But if you get the correct EPLI, you won't have to pay a dime for the lawsuit. Well, of course if you engage in purposeful malfeasance, then insuranced, corporations, or anything else will be null and void. This is for honest mistakes and accidents, never for rip offs. I'm not in any way saying you will, just giving you an accurate overview.
I don't know what your business is, so I don't know about the risk. Is it a dangerous thing, like rock climbing or wingsuit, or crabbing in the Artic Ocean? Because then the risk is great. But if it is reselling feather pillows, I think you are worrying to much about lawsuits. But again, I don't know what industry you are in and how delivered.
But again, the legal structures (separating out valuable assets into other corporations, insurance, etc) is important.
But there are so many other greater risks. Embezzlement. How many companies have I worked with that have been embezzled. Sheesh - don't even worry about lawsuits until you understand everything about financial controls. That is a much greater risk for 98% of the companies out there. I just read about one even yesterday - a man embezzled more than $17 million in cash. https://duckduckgo.com/?q=examples+of+embezzlement&atb=v282-...
You have to rank risks accordingly. Don't assign in your mind that something is a huge risk, but it isn't. And don't rank something in your mind as a small risk, when it is actually huge. I don't know what this could be in your specific case, so you have to do that, or talk to accountants, insurance person, and lawyer to help you. That's the holy trinity of professionals you need, and get great ones, not huxsters.