Bankrupt But Still Worth Millions?
By Fiona Ho . 26 November 2014 . Debt Management,Entrepreneurship, Money Management
Robert Kiyosaki, author of the bestselling Rich Dad, Poor Dad series of financial advice books, created a huge hoo-ha when he filed for bankruptcy protection for one of his companies in 2012.
Here’s what went down: when Kiyosaki’s company, Rich Global LLC was ordered to fork out about US$24mil (approximately RM80.6mil) to the Learning Annex and its founder, Bill Zanker, Kiyosaki filed for bankruptcy protection.
The back story? Kiyosaki had reportedly used the Learning Annex platform to organise several high-profile speaking engagements, including an appearance at Madison Square Garden in 2002.
The Rich Global-Learning Annex relationship reportedly generated sales of US$438 million (RM1.47 billion), of which Rich Global got nearly US$45 million in royalties.
However, the court agreed with Learning Annex that Rich Global did not pay the required percentage of profits and ordered the latter to pay just under US$24mil (approximately RM80.6mil).
The move to file for bankruptcy protection had many thinking that the author has gone bankrupt. In reality, it was Rich Global that filed for corporate bankruptcy, not Kiyosaki himself.
You may be surprised to learn that the American author and motivational speaker, who has 15 book titles under his name is estimated to be worth a cool US$80mil (RM268.6 million)!
Kiyosaki also operates as many as 10 other companies. Rich Global was just one of them and was said to be worth only US$1.8mil (RM6mil) in assets when it went under – barely a fraction of the US$24mil dollar judgment.
In filing for bankruptcy protection for Rich Global, Kiyosaki offers his fans yet another lesson in how the rich protect their assets. In Kiyosaki’s case, filing for corporate bankruptcy was a shrewd business strategy intended to safeguard his personal finances.
Below are some lessons that business owners can take away from Kiyosaki’s strategy to avoid financial downfall:
1. Choose the right entity for your business
A sole proprietorship (Enterprise or Trading Co.) is the cheapest and easiest type of business to start, but it may not be the best choice if you are considering protecting your personal wealth from business liabilities.
As a sole proprietor, you are personally liable for damages, which means that personal assets like your house, car and investments are at risk if a legal claim is filed against you or a business debt is called and you cannot pay.
Setting up an entity such as a limited liability company (LLC), also known as Limited Liability Partnership (LLP) in Malaysia, such as Kiyosaki’s Rich Global, will better protect you in the event of a lawsuit.
Limited liability companies are more expensive to set up and maintain than sole proprietorships, but it offers more protection from legal or financial claims than a sole proprietorship. It is a separate business entity and is not tied to your personal wealth, meaning you are not personally liable for business debts or damages your business might incur.
As Rich Global LLC is not tied to Kiyosaki’s personal wealth, he was not liable for the debts and damages caused by the company.
In Malaysia, other than LLP, a private limited company can also offer the same protection, where the liabilities of its members are limited to the amount of shares they hold in the company.
2. Keep your business and personal finances separate
If you are running a business or thinking of starting a business, your business and personal finances should be kept completely separate. It is advisable to maintain a separate chequebook for your business and use the company name (and not your personal name) on all business documents, including property titles and contracts at all times.
Kiyosaki had the foresight to protect his personal finances right from the start. For instance, he starts every new business as a separate entity, and is smart enough to run his business affairs through multiple companies.
Because Rich Global filed for bankruptcy protection, Kiyosaki’s personal assets were protected. Learning Annex could not touch any of his personal wealth.
He now conducts much of his business not via Rich Global LLC but under the Rich Dad Co.
3. Don’t take shortcuts
As with most things in life, taking shortcuts can sometimes come back to bite a business owner if someone who is suing you can prove you have been negligent or have acted fraudulently.
If you have acted fraudulently, the court has every right to “pierce the corporate veil”, a term used to describe a court’s action to hold LLC or corporate shareholders personally liable for the debts and liabilities of a business. What it means is, they can then come after your personal assets (including your house, car and investments) regardless of the entity of your business.
So “asset protection” isn’t so much about avoiding the consequences of fraud or negligence, as it is to protect yourself from the common misunderstandings and sour grapes that are part and parcel of the business world, as evidenced in Kiyosaki’s case.
Kiyosaki did not engage in fraud but, he and Learning Annex had a business disagreement. Learning Annex won, but because Rich Global was set up as a separate entity, his personal assets were protected.
No one starts a business with a mindset that it will fail. But in reality, disaster can hit your business anytime, so it is worth thinking about how you can best protect yourself should your business fall flat on its face.
Always think ahead so you can make plans to brace yourself and your wallet for the worst case scenario.
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Fiona Ho currently holds the position of Senior Writer at iMoney. Inquisitive by nature, Fiona remains keen in acquiring new skills and in finding new ways to expand her creativity (as well as her wallet).