Leverage with Creditors – Enjoy Faster and Smaller Settlements: Part 2
By: Barry E. Haimo, Esq.
August 17, 2022
Of course you want to obtain leverage in negotiating claims faster and for less money. Why wouldn’t you? It levels the playing field. This is not new, it’s just not known. The bottom line is that there are two avenues you need to pursue to protect yourself, your family and your business.
First, contact a competent financial planner. They will help you ensure that you’re maximizing employment of your creditor exempt assets. That means taking assets off the table from creditors and forcing them to look at your other assets. This is the first step in creating leverage with creditors.
Second, invest in an asset protection plan to create more leverage. Here’s why: statutes offer limited remedies to creditors of owners of certain types of business entities. This means that limited partnerships (LP) and limited liability companies (LLC) have better asset protection benefits than do corporations.
Your accountant may have advised you to form a S-Corporation, and that may or may not have been wise. Sometimes it may be prudent for tax purposes, but there are always other considerations in reaching the decision of what entity to form. Unfortunately, S-Corporations are not afforded the same outside liability protection as other entities. Hopefully it’s not too late for you to change to a more appropriate entity for your business and your family.
Nevertheless, Florida (and some other states) LPs and LLCs, if structured properly, limit creditors of owners of the entities to what’s called a charging order. It’s sometimes referred to as a charging lien. In either case, if a creditor is suing you personally and they want to take your business interests away from you, unlike if you own a S-Corporation, or worse, no entity protection at all, they will have to think again.
Why? Well, they are limited to receiving financial distributions in your place, which will never be made because you will be the officer that has managerial authority over the entity’s distributions to owners. In other words, the creditor will be unable to compel a distribution to satisfy their judgment.
Since you will make clear to the creditor that the entity will not make distributions while the creditor is waiting, the creditor is incentivized to negotiate his claim downwards. This is especially true if you have planned ahead and carefully ensured that your only assets available to creditors is the business entity itself. Again, more leverage.
Since the creditor is essentially a financial partner in the business, and the business is likely a flow-through entity for income tax purposes, there is a very strong argument that the creditor will be responsible for paying annual income taxes on its proportionate ownership interest each year, like other partners do, even on income that is not distributed. This is called phantom income.
To put it all together, you want to plan ahead and remove as many assets from the table as possible when it comes to asset protection. It levels the playing field. Plan head by consulting with both a financial planner, accountant and attorney, and preferably ones that work together frequently to offer a holistic approach to meeting your needs and exceeding your expectations.
Working together minimizes meetings and maximizes transparency among professionals, so your planning is more effectively and efficiently executed and maintained. Moreover, ensure that your professionals care about your needs so your planning is adjusted accordingly when the laws change or your circumstances change. That is precisely what Haimo Law offers.
Originally Published 2/4/2013 – Updated 8/17/2022
Barry E. Haimo, Esq.
Strategic Planning With Purpose®
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