Securing the Castle: Legal Tools Which Protect Business Owners
Asset protection is a key consideration for business owners. Entrepreneurs and professionals need to understand and properly use the tools at their disposal to protect their personal fiefdoms.
In a related article, Storming the Castle: Company Owners Can be Liable for Company Debts and Liabilities, we list many of the sources for personal liability which arise from owning a legal entity such as a Limited Liability Company (LLC) or Subchapter S Corporation. This companion article tackles the more pleasant topic of identifying the solutions that might be employed to avoid or minimize those debts and liabilities.
Proper Formation and Use of Your Entity
Many of the liabilities depicted in Storming the Castle can be avoided by properly observing the legalities attendant to forming and running a Corporation or LLC. A minimal but consistent level of due diligence will keep your entity in good standing and defensible against claims of piercing the corporate veil. Properly designate the company and your status when you are acting or signing for the company. With such efforts, the “castle” remains secure.
The ideal advice is to avoid personal guarantys of company debt and obligations whenever possible. Banks, lenders and landlords, however, frequently will not oblige such requests, particularly when the business is just starting up. In those circumstances, you may be able to limit the guaranty to a term of years, as these parties often recognize that business credit can stand on its own after three or five years. You may also be able to limit the amount you guaranty.
Offering Personal Collateral
In most cases, business owners are not asked to offer their personal property as collateral for business loans. Generally speaking, the business owner should explore other alternatives before making doing so. This alternative may, however, be better than offering the personal guaranty reviewed in the previous section.
You want to avoid or minimize your tort liability? One word: insurance. The range and breadth of insurance available to protect the business owner from tort liability is breathtaking. As we describe in related articles under our “Insurance” Articles heading, you can even insure against exposure for defamation and attorneys’ fee awards. The key elements are to secure the proper coverages which protect not just the entity but owners and key personnel as well.
Many of the other liabilities discussed in Storming the Castle can also be insured, including some statutory and criminal penalties. Unfortunately, you cannot insure every risk. There are other measures you can take to minimize exposure to such risks; read on.
Employee claims cannot be stopped; you can only hope to slow them down. The best front line defense to employee claims is developing sound employment practices and insisting on adherence to sound employment policies. Employment Practices Liability Insurance (EPLI) is another key component of an avoidance strategy. EPLI will protect the company, key personnel and owners from myriad claims which arise from employment practices. This coverage is sometimes offered as a rider to a typical CGL Policy, but usually must be purchased separately. Any enterprise with more than a few employees should seriously explore this option.
To the greatest extent possible, you must properly allocate your assets between you and your company. This must be done with property, bank accounts, credit cards, equipment, and anything else that touches upon the operation of your business or profession.
Allocating your assets among multiple companies is another effective device for avoiding unexpected liabilities. This planning tool is frequently used by real estate developers who form separate companies to own each separate commercial property. This planning method provides a first line of defense against imposing liabilities from one company’s property onto the other properties, even when the entities have common or the same ownership.
Jointly Held Property
Joint ownership of property is one of the easiest available strategies for avoiding or minimizing exposure of your assets to company debts. Married couples customarily jointly own their homes, bank accounts and other property. You must carefully consider such ownership arrangements when owning your company. If you are the only owner of your company, then the company’s creditors will not be able to reach assets which are properly titled jointly with your spouse, even if you give a personal guaranty or the creditor pierces the corporate veil. Once again, however, this method is not foolproof and is subject to some exceptions.
Revocable Trusts are a common estate planning device. Revocable Trusts do not, however, afford the Trust Grantor any significant protection from creditors while the Grantor is alive. Even upon the death of the Grantor, such assets can be pursued by creditors.
Irrevocable Trusts offer an important measure of protection against creditor’s claims, but they come at a high cost: loss of control. The Grantor who desires to protect assets with this device must part with exclusive control of the assets to achieve the desired protection. While this forfeiture need not be complete or permanent, it may look or feel like it to the Trust Grantor.
By “exotics” we mean blind trusts, offshore banking (e.g., Swiss bank accounts), offshore trusts, International Asset Protection Trusts, and all sorts of complex asset protection strategies. These strategies can be effective, but they also come with a loss of control and the risk inherent from placing your hard earned money or assets in a foreign country.
When it comes to asset protection strategies, there are abundant options for the entrepreneur to choose from, and each choice comes with its own pros and cons. Furthermore, making one choice does not exclude all the others. This article gives you a taste of the tempting but daunting menu that is on the table; for more, contact one of our attorneys to develop the right strategy for you.
Caution: This article provides general information and is not intended to be legal advice. Your personal circumstances likely vary from those discussed in this article. You should contact Lambert & Lambert PLC if you are seeking specific legal advice regarding the topics discussed above.
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