When it really comes down to it, owning a business is about making money. And most business owners want to keep the money they make. There are too many legal challenges to doing that. One is taxes and the other is lawsuits.
At this year’s Service World Expo, Larry Oxenham, senior advisor with the American Society for Asset Protection, explained the ways for HVAC contractors to lessen their tax bills and avoid many lawsuits. It all begins with how an HVAC contractor sets up the business, starting with who actually owns it or parts of it. A business is made up of many parts, including the actual money making product or service and any physical assets, such as property or equipment.
“Whatever legal documents you have signed have already made that decision,” Oxenham said.
An HVAC contractor can divide up ownership of these different parts to different legal entities. An LLC might own the building that houses the firm, while another might own the equipment. The main business would then lease these assets. All of these would be linked to a revocable living trusts, as would the contractor’s home and any safe assets.
Type of Incorporation Matters
The reason for doing this is that if there is a lawsuit, there’s little of value for the plaintiff to collect. Oxenham said the more money a business generates, the faster it will get sued. He said many business owners treat legal threats like they treat threats to their health. They buy insurance with the belief that it will take care of the problem when a lawsuit arises. Insurance actually makes a business a more inviting target, Oxenham said, because it almost guarantees a settlement.
The better approach is properly structuring the business. That also reduces a business’ tax burden. Oxenham’s group recommends against sole proprietorships. This type of incorporation offers little protection against lawsuits and limits tax reduction opportunities. Instead, HVAC contractors should create an LLC or an S- or C-corp.
HVAC contractors should also consider creating a family limited partnership for non-business safe assets, Oxenham said. These are assets unlikely to trigger a lawsuit, but that could be placed at risk by one. One example Oxenham gave was a dentist who inherited a large and valuable coin collection. For risky non-business assets, those that can trigger a lawsuit, Oxenham said HVAC contractors should consider creating separate LLCs. Examples of risky are usually physical property, such as a primary residence or rental homes.
Look Beyond State Borders
If HVAC contractors decide to go this route, they should look beyond their state borders for filing some of these. Assets that generate income, such as the main business and its building, need to have their incorporation papers filed in the state in which they are located. The safe assets FLP, however, should be filed in Alaska. Oxenham said that state offers the greatest protection against lawsuits. The LLC for the primary home should file in Wyoming, which has the strongest legal protections designed specifically for homes.
Oxenham’s group also recommends creating a management LLC that would have interest in the other three LLCs (risky assets, real estate, and equipment). This LLC can file outside of the property’s home state. He said Alaska is again the best choice.
The final piece of the puzzle is one many business owners avoid — what happens to the asset when they die. That’s why all of these different companies set up to own the various assets are all linked to the revocable living trust. This helps the heirs avoid the cost of probate and the risk of having the value of the assets made public, opening them up to legal claims.