Protectively titling your corporate shares to a Limited Partnership or similar protective entity is one of the best methods to make your stock less attractive to a prospective litigant. However, this alone may not be enough. You must make use of other tactics that can reduce the value of your corporate shares to a creditor.
One method is to issue irrevocable proxies which assign your right to vote your shares. If you issue a proxy to a relative, for example, a creditor who seizes your shares can’t vote your shares since you have irrevocably assigned your voting rights to your proxy holder. If the creditor gains no voting rights, it significantly lessens the stock’s value to the creditor (depending upon the importance of voting control). You can also sometimes exchange voting shares for non-voting shares, which similarly lessens the stock’s value.
Another tactic is to allow the corporation to assess your shares. Corporate shares that are assessable by the corporation are unattractive to a creditor because the creditor assumes the assessment. A potentially large assessment by the corporation correspondingly lowers the shares value to your future potential threats and creditors.
It is also possible to dilute your stock ownership. Why allow your creditor to control your family business? You can sell additional shares to other family members, or to family controlled entities (trusts, limited partnerships, etc.) to prevent your creditor from gaining control over the corporation. Or you may redeem your shares. Another idea: title your shares to an irrevocable trust.
Finally, you may pledge your shares as collateral for loans. Of course, you can use these tactics in any combination. The best way to protect, redeem, transfer or encumber your shares, will depend on the corporate restrictions and your unique situation.
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