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Whether the business you operate scratches out a basic living for you and yours
and employs only yourself, or it sustains the livelihood of several employees,
you would be well-advised to analyze your business’ vulnerability to litigation
claims from outside your company. After you complete your analysis, you may be
able to institute some asset protection strategies to reduce the occurrence and
impact of such claims.
You may never completely
insulate your business from all claims, but there are steps you can take to
reduce the risk of litigation from third parties.
(Note: Although
there are also risks of claims coming from within your company – i.e., from
employees – such potential claims are not addressed here. Another important
consideration is to reduce the likelihood and/or scope of collection by a
claimant against your business, which will be covered in a different article.)
Make Your Company
an Unattractive Target
Be sure that your
business operations are all conducted through the proper entity, so that you do
not unnecessarily expose your personal assets to a business creditor’s claim.
All contracts should reflect the entity name and your signature in your entity
capacity. Any potential claimant under a contract with the entity will be put on
notice that any claim against the entity will not necessarily give them recourse
against your personal assets.
Also, if you operate an
entity that engages in a variety of different but related activities, consider
creating a main entity that is the sole member of various subsidiary limited
liability companies – one for each business activity.
For example, your
business primarily sells widgets, but it also services widgets and sells widget
parts and supplies. It may also want to diversify into other related activities.
In this example, member(s) of “Widget Holdings, LLC” would be the individual
owner(s) of the business. There would be a separate LLC for selling the widgets
(“Widget Sales, LLC”), another for servicing widgets ( “Widget Service, LLC”),
another for selling parts and supplies (you guessed it: “Widget Parts and
Supplies, LLC”) and so on for any other different but related activity. Widget
Holdings, LLC would be the sole member of each of the subsidiary LLCs.
Under this structure, a
potential claimant against one of the LLCs may not have recourse against any of
the other LLCs or their assets, and your business loses some of its appeal as a
litigation target.
Finally, you can hold
ownership title to any valuable assets, such as machinery or other equipment in
the name of Widget Holdings, LLC, which then leases the equipment to the LLC
that uses it. This further reduces (a) the exposure of any equity in such
equipment to a claim against the using LLC and (b) the attractiveness of your
business as a target for a potential claimant.
This strategy is not
intended to be taken as applicable or advisable in every business operation.
Many factors must be considered in devising and implementing a structural
framework for your business, and those factors may dictate a variation of this
strategy or a completely different plan.
Finally, this is not a “one
size fits all” solution; it should be considered in your efforts to make your
business a less attractive target for potential claimants. The less attractive
your business is as a target, the less likely a potential claimant is to invest
in the financial and energy drain of pursuing a claim against you.
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