Asset protection for business owners in uncertain times
- December 2, 2009
Many business owners face a number of issues unrelated to revenue and expenses. One pressing concern is the threat to the business from liability claims. If you are selling a product or providing a service, the danger that you may be the target of a products liability or negligence claim is a reality of doing business. The business could be selling automobiles, landscaping, real estate development or property management, customers in a store. It does not matter because the concern is the same: if I am sued am I personally at risk, and is my business at risk?
Checklist of protection steps
Here is a checklist of basic safeguards all business owners should have in mind:
1. Do you have sufficient liability insurance in amount and in scope of coverage?
2. Are you aware of the various statutes of limitations that may protect you from various claims?
3. Do you operate as a corporation or LLC so that you are protected personally? Thus, liability would be limited to the entity, not its shareholders, officers or directors. This assumes you observe the corporate formalities so that a plaintiff could not “pierce the corporate veil.”
4. If the corporate veil was pierced, perhaps the stock is owned in a Trust or separate entity so that you are not personally liable as the shareholder.
5. If you operate as an S corporation or an LLC, do you pay out most or all of the earnings to the owners so that, if liability is limited to the entity, there are not significant assets at risk?
6. If there are various business activities (e.g., real estate holdings, real estate management, and real estate sales) do you maintain LLC’s or Corporation’s for each business to segregate liability?
7. If somehow personal liability attaches to the owners, officers, or directors, have you titled and positioned your personal assets so that the personal assets are protected? These personal steps could include tenants by the entirety, trusts, or entities that receive the protection of charging orders. For more information on these personal steps, see below.
Personal liability protection
If you are a professional you may be subject to personal liability for negligence claims regardless of the entity you create. Alternatively, any business owner who fails to take the necessary steps to ensure the corporation or LLC entity is respected can be liable if the plaintiff or creditor “pierces the corporate veil.” In either of these events, you may be personally liable. In the case of personal liability, what steps can you take to protect yourself short of a bankruptcy filing?
Here are some fundamental planning considerations:
1) Assuming you are married, are your assets titled “tenants by the entirety” with your spouse? Many states, such as Virginia, protect assets from claims against only one spouse if the assets are jointly titled with the spouse. One negative of titling assets “tenants by the entirety” is that it may not be desirable for estate planning purposes.
2) Have you irrevocably transferred assets to trusts with an independent trustee for beneficiaries, such as your children? In this event, if a claim later arose after the transfer the assets in trust would be protected. Some states, such as Delaware, offer additional asset protection if a Delaware irrevocable trust is created and managed by a Delaware Trustee.
3) Are you using LLCs or family limited partnerships with several members or partners so that, if you are sued, the remedy is a “charging order. “ A charging order precludes the creditor from attaching the assets or your ownership interest.
Of course, if you transfer assets after a claim or judgment arises, none of these transfers would be protected if the plaintiff can prove a “fraudulent conveyance.” A fraudulent conveyance refers to a transfer that renders you insolvent or that is done with the intent to delay, defraud or hinder creditors. Therefore, the protective planning described above is best accomplished and mostly likely to succeed if done before any known or potential claims exist. If the planning is part of a comprehensive estate plan it further enhances the likelihood of success.
John P. Dedon is a principal in the firm with the Trust, Estate & Tax Planning practice group of Odin, Feldman & Pittleman. Dedon blogs about estate planning issues for Virginians and U.S. citizens at dedonestateplanning.typepad.com