“Mr. Beaver, I have read your column for many years and trust your advice,” were the opening words of an overly-friendly voice on the phone.

“I need your opinion about ways of making it difficult for someone to sue me, and if they do, to collect on a judgment. I’m considering setting up a Nevada, Wyoming or South Dakota corporation or LLC because I’m told it is possible to save big time on taxes, even though my business is in California’s Central Valley.

“If someone wants to sue me, the people who file corporations in these states tell me that I will be invisible — no one will know who owns my company, and also, the IRS will not be able to touch me. I have already had two business failures, filed for bankruptcy, and don’t want to go through this again. Is there a legal way of escaping from my debts?”

Asset protection planning is legal – Tax fraud isn’t

“Lawyers and CPA’s who specialize in legitimate asset protection planning get these questions all the time,” Los Angeles-based tax attorney Bruce Givner tells You and the Law, adding, “often from someone who feels there is a magic solution to avoid financial responsibility, attracted to misleading information often put out by companies who sell corporation and so-called asset protection services.”

We asked Givner if there is any truth to the radio and internet ads which claim that, with a Nevada corporation, you can avoid taxes in your home state — and the IRS can’t find you.

“If you set up a Nevada corporation and conduct business in another state which has an income tax, then your corporation will have to pay tax on income earned in that state. If your reader deposits his business income into a Nevada bank account, he still owes taxes in California, and, if he doesn’t pay, this could easily be seen as committing state income tax fraud.

“For years there has been a myth that Nevada, Wyoming or South Dakota refused to cooperate with the IRS. This resulted in thousands of corporations formed by people who had no other connection to these states, but thought they could hide from the IRS, remaining invisible. Again, this is complete nonsense. All states co-operate with the IRS,” he points out.

We asked, “What about claims that the only way to ‘keep a low profile’ is by setting up a corporation outside of California?”

And Givner’s response to that claim?

“A misleading selling point of many of these asset protection programs goes along these lines: ‘By filing your corporation or LLC in our state, the identity of everyone connected to your business is completely hidden.’

“But The California Secretary of State’s website tells you that for LLC’s, partnerships and corporations they do not keep owner, shareholder, or employee information, and makes it clear that if you want that information, you’ll have to contact the business itself. The key paragraph on their website tells us:

Personal information such as telephone numbers, email addresses and social security numbers of business entity members (officers, directors, managers, members, partners, agents and employees) is not made of record with the California Secretary of State.

But there is something extremely important that you will find on the California website, and, as Givner notes, “It’s the identity of the Agent for Service of Process. That’s the person or company is designated to receive important correspondence, legal documents, law suits, and then, forward them to the business owners. This is not unique to California — all states have this requirement.”

“You’ve got to have a corporation”

Listeners to satellite radio can’t escape ads which scream the importance of setting up a corporation or LLC, “Or you can lose everything you own!” To Givner, this is a dangerous half-truth.

“It is totally false to suggest that just by setting up a corporation, anyone will automatically be immune from the consequences of being sued for a debt or accident that they might have caused.

“A corporation is an appropriate business structure and offers its owners some — but not total — protection from personal liability which is easy to lose if you do things like paying your personal bills from the corporate account, failing to pay corporate taxes, and many other ways.

“Asset protection–such as having auto and home owner’s insurance–is one way most people protect a lifetime of hard work,” he observes, but points out that, “It is only a partial solution. A frivolous lawsuit by a lawyer who has nothing to lose except a court filing fee will leave you with many sleepless nights, and a risk of losing over 40 years of hard work.”

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.

The post Myths about escaping debt, taxes appeared first on Dennis Beaver.