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Total business n00b here, so I'll be asking some probably dumb questions in the near future. Is it possible/legal/moral to shield your private assets by having them in your spouse's name? I will soon be a licensed architect and would like to start a firm with my s.o. She won't have a license, so would it be possible to shield our personal assets from professional liability by having them in her name?
You bet, that's a great idea.
You might also want to think about allowing criminal enterprises to launder money through your firm. Good money there.
Are you in a community property state?
I'll be asking some probably dumb questions in the near future
Like in the next sentence or so?
If your spouse is your business partner they share business liability.
My comment above was way too snarky, and I apologize. I understand wanting to protect yourself from opportunistic lawsuits, but something about your plan still strikes me as kinda wrong. I think that you should talk to someone who does this stuff professionally. Probably a good investment.
There are established methods for shielding yourself from liability. Try a simple corporation, an llc, a pllc, or one of the various other methods that have been used for years to shield personal assets from professional liability.
anonitect - that is a great idea . haven't been getting too many new project commissions lately, maybe I will look into it. An added bonus would be that all the mafiosos will need someone to build them Italianate villas - good money there!
Whoa...tough crowd. There are plenty of nut jobs out there that sue just for fun. The question is legitimate if the plan is ill conceived. In fact one of the major reasons for forming a LLC or S-Corp IS to shield personal assets. Look into both of these. Using your wife as a your kevlar vest is just not going to work. :)
Pacific Land Design
Shielding assets from wife would be wiser.
While this is an interesting discussion, remember that nobody here is an attorney. You need to consult an attorney on this question - not a bunch of architects. The few bucks you'll spend with a lawyer will be well spent.
Also, professional liability insurance is a better way to protect your personal assets - plus it doesn't get complicated if your relationship with your spouse goes sour.
archanonymous - a C-corp., S-corp, LLC, LLP etc. only provides protection from 'commercial liability' - those forms of organization provide no protection against 'professional liability'.
Thanks, at least for the good answers. Haha anonitect, I almost got my panties in a wad over your first answer.
Quiz, that's the real question I was trying to get at. I am neither married nor own a business yet, just trying to wrap my head around both.
I'd like to start a super small business though, and if I'm barely scrapping through, don't want some crappy client to try to take my house because his mother in law broke her hip on the stairs. I have been reading "How to start and operate your own design firm," and after I asked this question I read the insurance chapter wear he does recommend keeping assets in your spouse's name. I don't know how much that helps if she's actually part of the company though.
I guess I'll take my lawyer friend out for a few drinks soon.
Also, professional liability insurance is clearly the best answer.
While you're dreaming, fantasize about marrying someone rich to support your hobby.
Too late, Ive already got the someone and shes a designer as well.
an LLC gives you the liability protection of a corporation, my friend.
Full of it, maybe she can be your concubine and you can still find a rich wife?
Vado, I'm pretty sure neither LLCs nor corps give you professional liability protection. So if it's my stamp on the drawings, the company does not shield me. Anyone want to verify that statement?
Curt, that sounds like a great plan, though it might end up with no wives at all...
An interesting aspect to consider is what happens when you're a partner in a multi-partner firm and one or more partners - but not all - go through the asset transfer process to minimize liability exposure. I'm aware of one firm with 4 otherwise equal partners -- two of the partners have transferred substantially all of their assets into their respective spouse's name, another partner is unmarried, and the fourth partner is married but hasn't done the "total asset transfer" thing.
It's an interesting -- and somewhat troubling -- exercise to consider what might happen if an E&O judgment / settlement at this firm were to exceed that firm's E&O insurance limits. If the claimant were to pursue the personal assets of the otherwise "equal" partners, there clearly would be inequality with respect to individual partner exposure.
If you are in a community property state, the issue is moot as all property acquired during a marriage is held equally. But assuming you are not in a community property state, ask yourself this: are you more likely to face losing your home due to a professional liability claim that is not by your insurance, or are you more likely to get divorced? For most folks it is the latter. Do yourself a favor and:
Shielding assets from wife would be wiser.
This. Hate to tell you this, but 50% of marriages fail. Out of those 80% (or something like that) are initiated by the wife. Unless you are intentionally running your business in a risky manner that is probably going to get you sued, it's more likely your wife will claim these are not joint assets using your own game against you that you thought was so smart to shield them... I know a ton more divorced architects than I know ones who have been sued professionally.
talk to your lawyer buddy. insurance and llc would be my first guess. you should ask your friend about a prenuptial agreement while you're at it. just based on the experiences of a few friends i don't think i could ever trust a person to share half my assets, let alone give them full ownership.
There's a lot of nonsense being thrown around in here. Ignore it. Here's what you need to know (keeping in mind that while I'm not a lawyer, I've dealt with a bunch of this stuff before):
A properly set-up company structure will provide some level of liability protection for you personally versus being a sole proprietor. LLCs are usually the the best choice for architects, but an S-Corp is a viable option. LLCs have much more flexible and less onerous documentation and management rules than S-Corps. C-corps are only for people who want to scale big and go public. Hire a lawyer to set this up correctly.
Professional liability insurance is also important, but you should be careful with this. The more coverage you get, the more it will cost you. And perversely, the more it will make you a target. If you have a small practice, insurance can actually increase your chances of being sued quite a lot. You have to analyze and balance the risks and costs of being covered or not, and how much. As a business owner, this is your call.
Beyond that, there are legal structures and methods for protecting your personal assets in the event that the basics above don't cover you. Doctors, engineers, accountants, and architects should all consider their options on this, because there are plenty of ways for aggressive litigants to go after you personally if you in professional service, even if you are practicing through a veil and have insurance. The most common method is to put your main assets in trust. However, this has to be done very carefully and should not be considered or undertaken without EXPERT legal advice. A badly-structured trust may actually be worse than no trust at all. But a good one can make you essentially "judgment proof", which is the holy grail of litigation avoidance.
As for your spouse, they should be part of all the arrangements on this, particularly if you are in a community property state. Architects do seem to have a problem with divorce (especially when married to other architects), but even then, the risks are dramatically overstated by the commenters above. In 2010, the aggregate divorce rate for architects was 11%, which is high for college-educated professionals, but much lower than "50%."
From Starting Your Own Practice by Construction Attorney
Mark C. Friedlander of Schiff Hardin
A number of factors that cannot be thoroughlyexplored in this article enter into the decision. Designfirms operate as sole proprietorships, partnerships orcorporations.Sole proprietorship is the simplest legal form. A soleproprietor need comply with very few legalrequirements other than those pertaining to statelicensing and business permits. Sole proprietors arepersonally liable for business debts.Partnership is the simplest form in which two or moredesign professionals conduct business. As with a soleproprietorship, few legal requirements, other thanprofessional licensing and business permits, apply.Partnerships are less flexible than sole proprietorshipsbecause more than one person is involved inmanagement decisions, and partners must account toeach other for partnership activities. A significantdrawback is that partners are jointly and severallyliable for all partnership debts. In addition, personalcreditors can reach partnership assets.Operation and management of a partnership iscontrolled by oral or written agreement. State lawdecides issues left unaddressed. Many designprofessionals erroneously perceive partnerships asless expensive to form than corporations, but this isbecause they do not spend the time or money toprepare a partnership agreement. A well-draftedpartnership agreement can be expensive but can savemoney in the long run by anticipating unexpectedproblems.For example, assume A and B form a partnership andshare profits equally. A invests $100,000 and B, whohas a lot of talent but no money, promises to do amajority of the work instead of making a monetaryinvestment. Both A and B are anxious to start thepractice, deciding “to worry about everything elselater” and never prepare a partnership agreement.B works day and night to turn a profit. After a fewmonths, however, the partnership loses the $100,000A contributed. A, who did very little work, decides not to invest more money, and the partnership isdissolved.One might believe A and B parted company owingeach other nothing. However, logic does not alwayscoincide with law. All states, with the exception ofLouisiana, have adopted some form of uniformpartnership act. Under the act, B owes A $50,000—half the financial loss incurred—even though Bperformed most of the work. In addition, B would notbe entitled to any compensation. Had these issuesbeen addressed at the outset in a written partnershipagreement, B could have been paid and avoided thisliability.Corporation is the most complex form of business andis less flexible than a sole proprietorship or apartnership with respect to control and operation.State law and the corporation’s own internal rules,known as the articles of incorporation and bylaws,define the operation’s structure and control.Contrary to popular belief, corporations are not moreburdensome to run than partnerships. They mustfollow certain procedures that do not apply topartnerships or sole proprietorships, such as filingannual reports with their state of incorporation and inthe states they do business, giving formal notice ofmeetings, and documenting certain corporate actions.However, these forms usually take only a few minutesto fill out.In many states, design professionals can choose froma general business corporation, close corporation orprofessional corporation. In most states, any businesscan incorporate as a general business corporation.For the most part, these corporations have nostatutory restrictions on stock ownership or who canbe a director.Close corporations and professional corporations,however, do have statutory provisions affecting stockownership and directors. A close Design firms operateas either sole proprietors, partnerships or corporationscorporation generally has a limited number of ownersand simplified formalities to ease administrativeburdens otherwise placed on closely held businessesby general business corporation statutes. Closecorporation laws allow substantial restriction on thetransferability of closely held business stock,discouraging stock transfer without the other owners’approval.Professional corporations restrict ownership anddirectorship to licensed professionals of design firms.
The greatest advantage of doing business in acorporate form is that liability is more limited than in asole proprietorship or partnership. However,protecting corporate limited liability is, by no means,absolute. Design professionals are liable forperformed and supervised work. Bankers, landlordsand other creditors often ask for personal guaranteesfrom some, if not all, shareholders before extendingcredit. Shareholders also may be liable for otherfederal and state corporate taxes not properlydisclosed and paid by the corporation.
In 2010, the aggregate divorce rate for architects was 11%, which is high for college-educated professionals, but much lower than "50%."
Don't know where you are pulling your statistics from. Mine are from http://www.divorcestatistics.org/
45%-50% of all first marriages in America end in divorce. It goes up from there with 2nd and 3rd marriages. And if that 11% is a yearly... ugh. The national rate is only 0.36% every year and is down since the 90's.
Those aggregate divorce stats are extremely misleading, precisely because of that "all" you emphasize. They mash together a whole lot of different demographic and sociological categories that should be considered separately. For instance, the divorce rate for first marriages where both spouses have completed a college degree is less than 10%. High divorce rates generally correlate very highly with low levels of education, poverty, low class status,and a host of other things that architects are not generally known for. According to the statistics, smart, educated, higher-class people tend to get married and stay married. College-educated white people have an aggregate divorce rate around 10% and declining. The fear of divorce for educated professionals is way overblown (though you should think twice about dating a nurse, sociologist, or therapist, apparently...see below).
As for the stats by profession, the 2010 study is here: http://link.springer.com/article/10.1007%2Fs11896-009-9057-8
However, since you probably don't want to pay $40 for it, you can also find a summary here: http://lexfridman.com/blogs/thoughts/2012/04/14/divorce-rates-by-profession/
Don't forget to update the pre-nup.
An LLC or corporation plus professional malpractice insurance, plus holding your assets in a trust - which isn't a bad idea if you have kids anyways- should cover everything.
... which may be part of the reason it is so much easier to let go of the architecture dream for an increasing amount of graduates.
In addition to gwharton's good advice, I will emphasize that professional/personal liability rules vis a vis licensure vary from state to state. Get yourself a good local accountant who can explain it all to you and help you set up the proper structure.
High divorce rates generally correlate very highly with low levels of education, poverty, low class status,and a host of other things that architects are not generally known for.
Tell that to Peter Cook.
Gwharton gets 5 Stares on this one. Follow his advice. I was an architect/owner for 40 years with offices in 4 cities and an LLC or Inc is the correct tool, especially when starting out, that is all you need. It’s a great country to have these veils of protection but be careful. Make sure that everything that you do, emails, letters, contracts, even the return address on your envelopes says LLC or Inc. I once got penetrated for the infraction.
Now as time progresses and you hopefully expand you will be asked/demanded to sign personally for things like leases, mortgages, equipment and lines of credit. For this there is no veil. Then it is time to get a good attorney (you’ll have one by then) and investigate trusts and putting things in your wife’s name. We all do it.
A good attorney once told me that if something really goes bad there is little to protect you. What we are really talking about here are ass holes and predators.
The other thing to keep in mind with all this, is that your best defense is to not piss off your clients (or anybody else for that matter). Even the best company structure, insurance policy, asset protection plan, and iron-clad contract will be of little avail if you run up against somebody with a chip on their shoulder who wants to make you miserable and has way more resources than you do. Insurance companies are actually afraid of vindictive wealthy people, and will throw you under a bus at the first opportunity if they think you've run afoul of one. A multi-millionaire or billionaire can afford way more lawyers, forensic accountants, and investigators than you can, even if you are 100% innocent and in the right.
Wish to add the fact that the first/most likely place you will be sued is when you try to sue somebody that didn’t pay. A big aspect of practice. You’ll sue to collect and they will counter sue for things you can’t imagine. Here you are trying to collect a bill and you’ll all of a sudden see the tables turned and the whole thing change focus onto you.
To avoid keep a short leach on clients, don’t let them get out past 45 days. If they stop pay, stop work even if it hurts or you lose the client. Gwharton is right too, there is no substitute for not pissing people off. Architects generally as a breed are collectively inept socially. It may sound corny but taking a Dale Carnie course can pay off in spades. My wife owns a large school and is a master with people….you can imagine the things that can go crossways in her business and in 25 years has never gotten crossways with anybody. It’s a skill, if you’re not born with it, learn it.