Channeling Money to avoid Lawsuits?

Discussion in 'Growing and Managing a Business' started by joshf, Jul 20, 2013.

  1. joshf

    joshf
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    Is this possible. Imagine I want to set up a business immune to law suit. Could I legally set up two different businesses so that the one that's more likely to get sued doesn't have many assets because it has channeled all of it's money to the other company?

    IE My business A creates the product, nobody really knows the brand.

    My business B is the sales front. This is the brand, and the obvious company to sue.

    Business A "sells product" to business B at a very expensive price, so after business B sells it to the consumer, business B is breaking even. In other words my business B doesn't ever get any money, my business A keeps it all. Then if business B gets sued, there's not a lot of assets to give up anyways! The consumer may not even know that I own business A too.

    Is this legal, moral, possible?
     
  2. Fergal

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    Welcome to Business Advice Forum joshf, thanks for joining and asking your business questions.

    What country would the businesses be based in?
     
  3. markk luiss

    markk luiss
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    buisess advice thanks for the advice.
     
  4. kenzo

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    Lol, don't really know why but it made my day :D

    Back to the topic, your idea is pretty clever but the law is also very clever :p I suppose that to get really immune you have to be completely separated from the company which keep the money (which can be hard). If both of them would be owned by you, the trick probably won't work. I see quite many possible ways to "hack" your trick, but I'm not a lawyer so I won't give you any solid advice. You'd better consult a good lawyer about your concerns. :)
     
  5. beartheweak

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    Just remember that while you would be immune (if there aren't any legal implications... which is definitely worth checking with a qualified lawyer on first), you would be paying more than double in taxes; earned income for business A and business B will be taxed plus business B would be paying sales tax on product from business A. At this rate, you're most likely better off just taking whatever lawsuits come your way. Can someone else comment on the taxes involved here?
     
  6. joshf

    joshf
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    Thanks. The tax issue definitely makes sense... I wonder if there's any other way.

    I'm all about business responsibility but it seems like a lot of sharks are taking advantage of business through illegitimate lawsuits.

    I'm in the US by the way, but Id be curious about this for other countries as well.
     
  7. Rocky

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    Just curious to know, what kind of product are you talking about? And why do you expect to be sued for it? Is it something of low quality?
     
  8. joshf

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    Not low quality, I just feel like the legal system allows a flawed culture to take advantage of businesses. I'm not anticipating getting sued, and I don't have one specific product in mind.

    How about this, what if company A pays out all its money as dividends. Then it's a tax write-off when I use it in business B...

    Thoughts?
     
  9. beartheweak

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    You're talking about Dividends Received Deduction, I think. Here is a link for you to read up on how that works: DRD.

    I imagine that in order for you to make this scheme work, you would have to have Business B be involved in some legitimate business with a product or service to sell. You would have to make it do just enough "work"... sort of like what patent trolls do. They do just enough "work" to make themselves legitimately appear as though they are pursuing the development of the patented product (then of course, don't, and just sue everyone else that uses their ambiguous patents).

    Then again, I don't know of any laws that require a business to offer a complicated product or service... let alone, a product/service that is actually worth what Business B would charge.

    However, with all of this said, I don't want to encourage you to spend too much time on this scheme. If it was possible to do, ALL of the major corporations would do it, and just file bankruptcy each time their "front" businesses were sued... then reestablish new ones. Besides, the DRD may not apply to the kind of business scheme you are theorizing about.

    Also, don't take any of my advice without doing your own research and verification. I'm just a 22 year old, albeit, an experienced one. :p
     
  10. alicemenezes

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    The law is smarter. I don't think that would work.
     
  11. Business Attorney

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    There is nothing wrong with setting up separate companies but all of the dealings between the companies must be at arms-length. If you sell products from one company at artificially high prices simply to eliminate any value in the second company, it is likely that the independence of the second corporation would be brought into question. See my outline on piercing the corporate veil at http://www.illinoisbusinessattorney.com/articles/piercing_veil.html

    Also, there is no such thing as being immune from a law suit. You may be able to structure your business dealings to increase the likelihood of successfully defending a law suit, and that structure may even discourage someone from bringing the suit in the first place, but it does not prevent someone from trying.
     
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  12. Nathan26

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    If both the business have the same owner may be he must sue for his other business.He may limit his liability and get the benefit in this way but it depends on that state where he is living that the state allow him to run a business in this way.
     
  13. Changed Creation

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    I think the motivation of minimizing your risk is what every business should ask itself. The key is to find the legal structures to layer your dealings in such a way that you protect both yourself and your client. eg In South Africa many people would look at you if you're crazy to do your business in a Business Trust. But I know that if you do have the appropriate knowledge, you can go a long way protecting yourself and your business. Just my take!
     
  14. amwarner

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    I have to agree with what Business Attorney said in regards to independence of second corporation. If one of your companies is the parent company (the company nobody knows about) and company B is the ones taking all of the risks, I believe that they both have to be operating as separate entities. The law IS smart and if they find out that you're moving all money from the company that's getting sued, to this other company, possibly red flags ill come up and may put that business in danger. Because I read of some instances where a parent company is liable for the actions of a subsidiary company. Where the law looks at it as fraud because of improper transfer of assets and other fraudulent means to avoid the subsidiary company’s liabilities.

    And, like it was mentioned, there's no possible way to be immune from a lawsuit.

    Just letting you know.
     

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