RETIREMENT ASSET PROTECTION FROM BANKRUPTCY

April 2010 I rolled my former employers 401k over into a qualified retirement profit sharing plan via a notable company.  A  C Corp was established and the 401k was converted to stock.  The profit sharing plan owns 99% of the stock and my wife and I own 1%. [Company] advised this was all legal thru Erisa law.  The stock was converted to buying into a Franchise and purchasing assets.  [Company] takes care of the form 5500 and charges $120 mo to maintain the plan. In March of 2011, I had to close a separate unrelated LLC that was formed in Aug of 2007.  My business partner filed bankruptcy leaving me the sole personal guarantor of the SBA loan which the bank has filed suit against me to collect.  The LLC has 250k of SBA loan balance and another $100k + of personal guaranteed debt outstanding. 3 area Northeast Oh lawyers say I cannot exempt the C Corp assets. Benetrends advised the assets are exempt. Are the C Corp assets exempt or will I lose them to bankrupcty?

Small Biz Guy:

3 area Northeast Oh lawyers say I cannot exempt the C Corp assets.

Are they bankruptcy attorneys or tax attorneys?

If they aren't tax attorneys, you'd be wise to get a tax attorney to examine that Benetrends deal to determine if it was a qualified retirement plan under IRS rules.

Meantime, read a couple of articles on the subject:

http://www.entrepreneur.com/article/207190#

http://www.bluemaumau.org/6941/irs_expert_give_warning_rollover_industry

Plus you may need to examine details of your current  franchise operation and employees to sort out if an initially conforming to ERISA plan continues to conform to that protection envelope --very tricky and beyond me-- use counsel.

PS consider what pocket you use to pay counsel. .

Small Biz Guy:

Are the C Corp assets exempt or will I lose them to bankrupcty?

Who was your business partner (an individual, some business entity, or what) and what business is this – the separate LLC or something else? What is the role of the C-corp in all this and what assets does it have? Did you file bankruptcy? Did the C-corp file bankruptcy? The only bankruptcy you've mentioned so far is your "partner," by which I'm assuming you mean the other member (LLCs don't have partners) of the LLC you had, but your facts are not clear. If the only bankruptcy is the other member of the LLC, then I don't see what connection this has with your profit sharing plan or the C-corporation.

As a starter, the C-corporation is a separate entity from its shareholders. The assets that the C-corporation owns is thus not affected (at least not directly) in any bankruptcy of the shareholders. That means that the C-corporation's assets cannot be taken to pay the shareholder's debts (though the shareholder's stock may be taken, unless exempt under the applicable state law) but also means that the C-corporation assets are not exempt assets in any shareholder bankruptcy (though, again, the shares might be exempt). So, it matters a great deal who is filing the bankruptcy and what the C-corporation's relationship is with that bankrupt person/entity.

Thank you for your response. I have not filed for bankruptcy yet, but will need to soon. The LLC was formed with my business partner and had no relationship with the later C Corp which was formed with my 401k rollover.  The LLC had obtained an SBA loan that my partner and I both signed personal guarantees on. Our business was failing, we fell behind on payments on the loan and the bank urged us to close so we did.  Hence my business partner filed for personal  bankruptcy and discharged his debts.  

The C Corp was created thru a 401k rollover of my past employer in which [the company] contends is completely legal and exempt under ERISA law.  However, as I read, there are so many blogs saying the assets of the C Corp are not exempt and others that say there are.  The C Corp itself has zero debt and is not filing.  The "qualified profit sharing plan" stock owns 99% shares and myself and wife own 1% share.  My understanding is that it is a separate entity that my wife and I are employees of.  Ive talked to lawyers in my area who believe I was scammed by setting this up, I cant see this and other companies doing these plans if they werent legal. 

The issue for me is, whether a Bankruptcy Trustee will find the C Corp assets exempt or as personal assets that will be liquidated and sold.  I am having trouble finding a TAX/ERISA/BANKRUPTCY lawyer that has knowledge of all 3 as it is apparent that most of the consumer bankruptcy lawyers only want the simple black and white cases and shuttle you through their office like cattle. Not many attorneys are familar with Rollovers for a Business Startup Plan (ROBS)

this is an exerpt of some of the stuff I read:

Asset Protection for Owner-Only Plans

Any plan that is classified as ERISA will be protected inside or outside of a bankruptcy proceeding. However, if a retirement plan benefits only the owner of the plan and their spouse, it is not considered to be an ERISA plan and it will not qualify for protection. In a bankruptcy proceeding, owner-only plans are not at risk. If there is no bankruptcy proceeding, the plan will still be protected if non-owner participants are added to the retirement plan. This means that if you add other participants, the plan is no longer owner-only and it will be protected. This is one of the best ways to protect any owner-only retirement plan.

Small Biz Guy:

The C Corp was created thru a 401k rollover of my past employer in which [the company] contends is completely legal and exempt under ERISA law.  However, as I read, there are so many blogs saying the assets of the C Corp are not exempt and others that say there are.  The C Corp itself has zero debt and is not filing.  The "qualified profit sharing plan" stock owns 99% shares and myself and wife own 1% share.  My understanding is that it is a separate entity that my wife and I are employees of.  

And what does the corporation do? Is it your business? Are you drawing salaries from it? What kind of assets does it have?

Small Biz Guy:

 Ive talked to lawyers in my area who believe I was scammed by setting this up with [the promoter],  I cant see [the promoter] and other companies doing these plans if they werent legal. 

Just because companies do it doesn't mean it's legal. Lots of scams happen every day even though they are legal. And even if legal, it doesn't mean that doing the transaction is a smart thing to do. Without reading the documents to see exactly what you did I won't opine as to the effect of what you did, but in general this kind of investment for your retirement funds is a risky one, and I'd not recommend clients put most of their retirement funds into something like this. There is a reason why most people don't enter into these sort of arrangements.

Small Biz Guy:

Asset Protection for Owner-Only Plans

Any plan that is classified as ERISA will be protected inside or outside of a bankruptcy proceeding. However, if a retirement plan benefits only the owner of the plan and their spouse, it is not considered to be an ERISA plan and it will not qualify for protection. In a bankruptcy proceeding, owner-only plans are not at risk. If there is no bankruptcy proceeding, the plan will still be protected if non-owner participants are added to the retirement plan. This means that if you add other participants, the plan is no longer owner-only and it will be protected. This is one of the best ways to protect any owner-only retirement plan.

I don't know, when I read that it seems to me that having your wife own 1% disqualifies the plan from bankruptcy protection.

That's why you first need a tax attorney to thoroughly examine what you did and determine if it's a qualified plan or not.

If it's not, then you take your lumps in bankruptcy plus you might have to pay taxes and penalties on the 401(k) distribution.

If it does turn out to be a qualified plan then your tax attorney can work with your bankruptcy attorney to convince the bankruptcy trustee that the plan is exempt. This will not be a cookie cutter bankruptcy that costs $1500 so plan on spending a lot more than that on lawyer fees.

I would think that ROBS have been around long enough that at least some have been involved in bankruptcy problems  --and that the  suburban Philadelphia firm you mention probably has a vested interest in its particular point of view as to asset protection being upheld in the market place. and I'll bet at least some of their clients have plowed the road ahead of you.

I certainly would make some verbal contacts back with that firm and ask/listen for possible resources as to  prior  road plowing/protections and relevant counsel or cases.  They may be more worried about their skin in the marketplace than yours --so add a big dash of salt.