Martial Arts Professional Magazine

When I served my three tours of military duty in Southeast Asia, we used multiple layers of defensive methods, or multiple redundancy defenses, to protect an installation.

For example, my job as a dog handler was to be the first level of defense, encountering the enemy outside the perimeter of the installation. We were also an early-warning system for those at the installation. The next levels of defense, in this order, were a listening post, with a rifleman behind sandbags; towers, M-60 machine guns and night surveillance devices guarding the perimeter fence; and then bunkers and roving patrols inside the perimeter. This same strategy of multiple levels of defense is equally important and effective to protect your martial arts school and wealth.

Protection of Your Real Estate

Ray Kroc, the founder of McDonalds, once said he was not in the hamburger business, but in the real estate business; the hamburgers simply paid the mortgages. I would encourage you to follow Mr. Kroc’s example and consider yourself in the real estate business. You can maximize the value of the tuition your students pay by using it to pay the mortgage on a facility you own, instead of just rent. That can be an excellent wealth-building asset for any small business owner.

When you decide to buy a building for your school or any commercial real estate, you should implement multiple layers of defense through the use of legal and/or corporate entities to protect those assets.

For example, you can combine a land trust with a limited partnership and a corporation to insure lawsuit protection of your real estate. The limited partner’s interest in a limited partnership is virtually “untouchable.” A general partner, while in control of the partnership, is subjected to personal liability; therefore, you need a general partner under your control to “stand in” and take the hit. The solution is to create a corporation to be the general partner of a limited partnership. The corporation must only have a small interest for the purpose of control.

If the limited partnership were sued, then the general partner, not the limited partners, would be liable. If the corporation had little or no assets, the limited partners could “cut it loose” by buying its entire shares for a token amount. The limited partners would then create a new corporation to be the general partner.

Now, let’s add one more layer of protection. The real estate will be titled in a land trust. The beneficiary of the land trust would be the limited partnership, with a corporation as 2% general partner. The corporation, of course, should be under ownership or control of the limited partners (i.e., the limited partners could also be the stockholders of the corporation).

Variation: The Limited Liability Company (LLC)

In the above scenario, you may consider an LLC instead of a corporation/limited-partnership combination. It involves less paperwork than using two entities. Some states, such as California and Texas, impose a high annual franchise tax on the use of LLCs, which makes using multiple limited partnerships more cost effective. In these high franchise tax states, it is cheaper to use multiple limited partnerships than multiple LLCs.

Here Comes the Lawsuit

Let’s suppose a student or vendor decides to sue the owner of the property. The first layer of protection is the land trust. Even if the property owner or his attorney were familiar with a land trust, he would have to designate the beneficiary. The student or vendor’s attorney would then have to ask a court to set aside the land trust.

Even then, the attorney would be confronted by a limited partnership (or LLC). He could try to sue the general partner, only to find that it was a corporation. He might obtain a judgment against the corporation, but its only asset is a 2% share of the limited partnership. The limited partners then decide to cut the general partner loose by buying its 2% share. The student or vendor’s attorney could then try to attach the limited partner’s interest, but that attempt would be futile. In his last desperate attempt, he tries to persuade the court that the corporate general partner is a sham and should be pierced. The court agrees and a judgment is entered against the property owner. By the time this whole process is completed, however, his cash is safe in other LLCs and trusts.

The more roadblocks you put in front of your potential creditors, the less likely they will sue you. If they insist on suing you anyway, then you can stall their collection efforts for years and force them to settle their claims for a fraction of their value. The sophisticated wealth warrior starts the process of asset protection before the assets start building and your martial arts school is making big money and owns multiple of real estate.