There are two kinds of legal risk for those who own a business or are
self employed professionals.
The first (and the most likely) is the legal liability that
arises from the conduct of a trade or business. Thus, any business could
be sued because of some claim by a customer or employee of the
business. The same can happen with respect to the tenants of any rental
properties. When you own and manage a business, regardless of the
legal form, a plaintiff will usually sue you as the owner, president,
officer and/or director in addition to suing the business itself. Thus,
the liability claim will usually be aimed at the owner as well as at
the business. If the plaintiff prevails, the owner's personal assets
will also be at risk if the business assets and insurance are not
enough to settle the claim.
Even if there is enough insurance to settle a claim from the
first lawsuit, it will then become very difficult to get insurance or to
find insurance that doesn't cost more than the profits generated from
the business.
It isn't practical or reasonable to protect all of the
business assets from claims that arise within the business. The
practical solution is to segregate some business assets and to protect
non business assets (or assets of other businesses) from exposure to
claims from within a business.
The second form of risk arises from claims coming from
outside the business rather than from within the business. This is much
less likely unless you have more than one type of business. If you have
invested some of your money in rental property, that could become the
source of a claim.
For example, the owner of a retail business also owns an
apartment building. Someone is injured by an automobile owned by an
employee of the retail business. The employee doesn't have any money or
insurance and the accident occurred while going to or from work. The
plaintiff sues the retailer and may win a judgment far in excess of the
insurance and the assets of the business. The judgment will usually give
the plaintiff the right to take any other property of the owner -
including his apartment building and any personal assets.
In most cases, any jointly owned property can also be taken.
Thus, if the building owner is a joint owner of savings accounts and
securities with a parent, the parents' assets could be taken. If the
owners' spouse is a joint owner of property with the defendant, the
spouse's jointly owned assets can be taken. If the spouse is a joint
owner of property with his or her parents, those assets could be taken
if the spouse is named as a defendant in the suit.
The same thing can happen in the opposite direction if a
claim arises from the retail business. The judgment creditor can take
the apartment building and any personal assets or any jointly held
assets.
There are a variety of ways that a self employed person or
professional can reduce the chance of losing assets in a business
because of a personal lawsuit and/or from a lawsuit against the
business. To protect the business assets from claims against the owner,
the business can be organized as a limited partnership or a limited
liability company. To protect the assets of the business, it may be
necesary to to have some of those assets owned by separate entities.
Critical equipment can be owned by an equipment leasing trust, family
limited partnership or LLC that is owned by family members. Other
methods of protection can include equity stripping, which involves
taking out loans with specific assets used as collateral. The funds
from the loan then need to be placed in a protected entity such as a
LLC or perhaps in a life insurance policy if state law provides
protection for such policies. Numerous other methds are discussed in
detail in our subscriber's web site.
