Financial Privacy Using Legal Entities

When I speak at workshops, I’m often approached by audience members who want to know how to use legal entities for more than just the tax planning, business development and lawsuit protection benefits. They also want to use them for privacy protection. In this article, we’ll explore their use solely for that purpose.

A Separate Legal Person

By their nature, wide recognition under the law, and tax treatment, legal entities are excellent vehicles to use in protecting your privacy and holding ownership of assets in a way that provides a lower profile and helps enhance protection of your personal and financial privacy.

In my first book on privacy we examined the growing threat of Identity Theft and the frightening trend of fraud and theft taking place in America and examined many strategies for preventing it. A few years later, my second book on privacy we looked deeply into the subject of using legal entities as a tactical means to hold ownership of assets in a way that would deflect attention away from you personal, lower the risk of loss due to personal liability, and help manage and enhance your personal financial privacy. In this article, I’d like to pick out three specific legal entities for their privacy considerations:

Corporations
Limited Liability Companies
Triple LPs

What they each have in common is that they are legal entities recognized by states that use statutory protection. Each of them is considered a separate legal person from their owners. Each of them can have a separate identity and tax life apart from their owners. Each of them have been recognized not only by statutory law but tax law as well and have been the subject matter of court examination.

While the corporation, the limited liability company and the limited liability limited partnership have each respectively been separately examined in terms of their business use and asset protection utility, this article will examine each of them solely in terms of privacy.

Using a Low-Profile Corporation

Corporations have been with us a long time. They arise from the tradition of English common law, and are used extensively in the USA. A corporation is defined as an artificial legal person that is considered a separate legal entity from its owners. Similar to a natural person, a corporation can own property, enter into contracts, hire and fire employees, open and maintain bank accounts, use the courts to pursue remedies and defend itself, and is legally authorized to do whatever is necessary to carry on a business.

One advantage is that a corporation’s owners (who are referred to as shareholders or stockholders) are generally not personally liable for the corporation’s liabilities and debts (except that the IRS can pursue the shareholders for a corporation’s unpaid taxes). Every for-profit corporation begins life as what is known as a ‘C’ corporation and is taxed separately from its owners. Some of them subsequently elect to be taxed under subchapter ‘S’ of the Internal Revenue Code and are then taxed as pass-through tax entities, meaning that their profits are taxed federally and reported on the personal income tax returns of the corporation’s owners. For many years in the late 20th Century, using ‘S’ corporations was the knee-jerk default approach taken by many advisors. However, see my article ‘The S Corporation is a Dinosaur’ and examine it in comparison to the LLC.

From a privacy perspective, a privately-held corporation (one that has not ‘gone public’) can certainly be used for creating a lower profile. For example, if the corporation does not have your personal name attached to it (i.e. ‘The John Alfred Jones Corporation’) but instead uses a commercial trade name (i.e. ‘Green River Lending, Inc.’), your personal identity is not a neon sign attracting attention to your personal identity and raising awareness of your relationship to the company.

The corporation can have bank accounts, vehicles, investment accounts, trademarks, copyrights, patents and other assets in its name without your specific identity and financial status being associated with it.

LLCs and Financial Privacy

By its legal nature, a Limited Liability Company (or ‘LLC’) is an ownership structure that allows its owners (which are called ‘Members’) the advantage of limited their personal risk of liability and at the same time offer them the advantages of taxation more similar to a partnership, in which the profits of the enterprise are passed through to the owners and taxed on the income tax returns of the owners rather than the LLC itself.

An LLC is a separate artificial legal ‘person’ and like a corporation it can own bank accounts, investment holdings, land, office buildings, residential property, mutual funds, stock trading accounts, option accounts, commodity trading accounts, and intellectual property as well, such as copyrights, trademarks and patents.

Held in the name of the LLC, assets are more private. It is less likely than an Identity Thief will have access to assets or accounts held in the name of the LLC. This allows you to have a lower profile and enhances your personal financial privacy since the entity’s ownership of an asset does not necessarily in and of itself reveal your personal identity. This is why many celebrities, investors and others who wish to protect their privacy use the LLC.

Private Triple LPs

All 50 states now have Limited Partnerships within their statutes. A limited partnership is defined as a structure that allows its owners (called limited partners) to benefit from limited personal liability for the debts and liabilities of the partnership. In the majority of the states, the general partners have unlimited personal liability. But in a growing minority of states, the trend is for general partners to also enjoy liability protection under a more advanced version of this entity form called the Limited Liability Limited Partnership.

The key distinction between the general partner and the limited partners’ role has to do with day to day management and decision making authority. The general partners operates the partnership and makes the daily operational and investment decisions. The limited partners on the other hand are passive investors, are not allowed to make business decisions.

The more advanced version – the Limited Liability Limited Partnership (also called the ‘LLLP’ or as I refer to it as the ‘Triple LP’) – provides the enjoyment of limited liability to the general partner, and it can own property in the same private way that corporations and LLCs do. With the partnership’s name on assets, your personal name is not. With the partnership being the owner of investment accounts such as a stock or option trading account for example, it’s far less likely that an identity thief could even know about the account much less have access to it.

The point of course is that by not even knowing about the existence of the account – held in a name other than yours – the likelihood of access by an unauthorized person who somehow manages to steal your personal identity is far less realistic and you are much better protected than you would otherwise be.

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