***A Word to Entrepreneurs . . . Formalize Your Business Entity Now!

Robin is a cosmetologist and massage therapist who recently began investing in real estate in hopes of supplementing her income. Robin is enjoying a comfortable lifestyle from her full-time job, but is basically a sole proprietor who leases space from a salon owner. Additionally, as a sole proprietor, she has few, if any benefits. Seeing that she needed to establish her own benefit plans and residual income, Robin began investing with a coworker who took real estate investment courses with her. Additionally, the salon owner, who didn't understand real estate investing, agreed to invest cash to help fund the deals that Robin and her coworker would find and put together.

Since they were all “pals” from work, the ladies had no formal entities or agreements other than their word for each of the deals. They basically operated on a “hand-shake agreement” whereby each received a portion of any of the cash flow from each investment, depending on how much work or cash they had put into that deal, respectively, and their ownership percentages varied accordingly.

In addition to partnership with her pals from work, Robin had taken some of her extra cash from the real estate deals and had begun “flipping” a property or two every year. The other two ladies weren't really interested in this venture, but Robin and her 12-year-old son Dean really enjoyed finding, fixing up, and selling properties.

Since they got along well and seemed to have a knack for finding properties that gave them at least a small cash flow, Robin and the other two ladies were perfectly happy with the hand-shake agreement that they had.

After being in business for a few years, Robin realized that not only was she personally liable for her investments, but for the liability of her two partners as well. She also realized that they had no buyout or right-of-first-refusal agreements if one of the three ladies wanted or needed to get out of a deal. Robin was relatively frugal and quite the saver, and she realized that her wealth was threatened by her fellow investors' debt.

After Robin's realization of how much her assets were at risk, she came into my office asking how she should structure her wealth and business dealings so as to provide the best asset protection, tax reduction, and estate planning benefits possible.

Our first job was to identify the holes in Robin's business structure and suggest ways to rectify the situation. We quickly discovered that Robin, individually, and together with her two pals, had by default set up the two worst types of business structures--the sole proprietorship and general partnership. Our next job was to help Robin restructure her business and personal assets.

Before even trying to counsel Robin on asset protection issues, we first had to think about estate planning because she was also a single parent. Accordingly, we set Robin up with all the essential estate planning tools.

Next, we next attacked her asset protection woes. Each of the properties owned by Robin and her two pals in the general partnership were fairly new purchases with little or no equity. Therefore, we decided to put the four properties into two LLCs. Additionally, we executed specific operating agreements for each.

That’s not all. You can read the whole story in my new book, Trump University Asset Protection 101: Tax and Legal Strategies of the Rich.

My goal in writing this article for you today is to raise your consciousness about the dangers of establishing business entities with nothing more than a shake and a smile. To protect yourself, your family - and your business - you need to apply the latest strategic thinking and advice.

J. J. Childers is an attorney dealing primarily with the topics of asset protection, estate planning, and tax reduction. He travels the country extensively working with individuals and companies to help them with their small business wealth structuring. He is author of the new book Trump University Asset Protection 101.