Protecting Family Business Corporations

Family businesses should be planned with asset protection in mind. In previous post on this blog I have strongly suggested using limited liability companies in lieu of corporations for new businesses for reasons which will not here be repeated. In the event a family has an existing corporate business owned by both spouses, there are still planning possibilities to protect the corporate shares from creditors.

Consider the hypothetical situation where a man owns 50% of the shares in a valuable, successful corporation, and his wife owns the other 50 % of shares. If the husband only has a creditor problem, the creditor after obtaining a judgment against the husband can seize his stock and acquire 50% of the controlling interest in the corporation. As a 50% shareholder, the judgment creditor and debtor’s spouse will be in a permanent voting deadlock. This situation is good for neither party.

If either spouse saw a creditor on the horizon a transfer of their stock shares would be reversible as a fraudulent transfer. Perhaps a better alternative would be for the husband and wife to hold a corporate meeting in which they vote to issue additional shares to the non-debtor spouse in consideration for an additional cash contribution to the corporation. The stock issues effectively dilutes the value of the shares of the debtor spouse. It also gives the non-debtor spouse majority voting control. If a judgment creditor seizes the stock owned by the debtor spouse, the creditor is in the position of a minority shareholder without power to significantly affect corporate business decisions. The issuance of additional corporate shares devalues the debtor spouse’s stock, and puts the debtor spouse in a better negotiating position with his creditor.

In addition, the corporation’s issuance of new share in exchange for consideration is arguably beyond the definition of a fraudulent conveyance by the debtor spouse.