There are many ways that privacy can fail, which could include, among other things, a disgruntled ex-spouse spilling the beans, to carelessness in operating the business, to being forced to reveal one’s connection to an entity in a post-debtor examination (or otherwise commit perjury, which the authors strongly discourage). Every asset protection plan needs a solid legal structure underneath that will survive creditor attack regardless of whether its privacy holds up or not.

However, as one of several layers of protection, financial privacy does have its benefits, such as avoiding the appearance of being a “deep pocket”, which helps prevent litigation. Such privacy is often the primary benefit espoused in the many marketing promotions of Nevada corporations, and to a lesser extent, Wyoming and Delaware corporations. Most of these promotions say that a corporation may be set up with “nominee” officers to shield the identity of who actually controls the business. (This is great for the nominee officers, since they can now charge the client each year for their nominee services.) Furthermore, in most states the identity of shareholders is not a matter of public record. It is true that this strategy provides some financial privacy. At the same time, complete financial privacy is more difficult to obtain than one might think, and as a result many clients forego such privacy measures, and instead focus mainly on a solid asset protection structure. For example, if one is a signer on a corporate bank account, they are linked to the corporation (and although this does not signify complete control over or ownership of the corporation, it is a starting point for an investigator to unravel one’s financial privacy program), and thus for complete privacy a nominee must be used for all banking purposes. Many individuals may not trust someone else to have exclusive control over their company’s bank account. Furthermore, for complete privacy a corporate bank account may not receive any deposits from any account that could be linked to the client, nor could payments (other than cash withdrawals) be made to any account or to pay any expense that would link the bank account to the client. Using a corporation in this manner is possible, but it may be more difficult to do than one initially supposes.

Furthermore, an S corporation must file an income tax return annually (form 1120S), and reveal its stockholders to the IRS via schedule K-1. A creditor may be able to obtain these forms during the discovery process, or especially during a post-judgment debtor’s examination, in order to link the client to the corporation. If the corporation is taxed as a C corporation, and the client takes any dividends from the corporation, then he will be linked to the corporation when filing his or her annual 1040 return (schedule B), and a creditor may be able to obtain these returns in the same manner as they would with an S corporation.

An LLC formed in certain jurisdictions may in some instances reduce the requirements for obtaining financial privacy. Such LLCs are called “anonymous LLCs” because the state never asks who its members or managers are.177 The more popular anonymous LLC states include New Mexico, Missouri, Oklahoma, Delaware, and Indiana. Some states, such as Indiana, never even require an LLC organizer to provide a principle place of business address. Other jurisdictions, such as New Mexico and Missouri, do not require annual reports to be filed by the LLC. Therefore, LLCs are generally more flexible and easier to operate in a private manner than corporations, and a nominee officer or manager may not be required in some (but not all) instances. Furthermore, if the LLC holds non-income producing property, then unlike a C or S corporation, no income tax return need be filed. Nonetheless, obtaining a “private” bank account normally entails a process similar to that used with obtaining private corporate accounts.