Planning ahead for protection from creditors, predators, lawsuits and bankruptcy is critically important for business owners. These strategies require planning before your issues arise.
All business owners’ deal with risks of legal action from employees, customers, and other third parties, but by planning ahead for those risks with the right legal tools, you can keep your family’s personal assets safe from those business risks. If it is important to keep claims against your business separate from claims against your personal assets such as your home, vehicles and life savings, then implementing asset protection strategies combining limited liability entities such as corporations and LLCs with asset protection trusts is a must.
Don't Let This Happen To You
Would you be prepared for such an event? Years ago, our firm had a client who operated a bicycle repair shop. One of his employees failed to repair a bicycle properly. A screw in the bike came loose while being used by their customer. It caused that person to flip over their handlebars and hit their head on some pavement. Brain injuries left them with a lot of medical bills and a host of issues for the rest of their life.
The customer took legal action, holding the bike shop responsible. Even though his employee was the one at fault, the business owner was the one on the hook for the damages. Suddenly everything was on the table for the owner of that repair shop. His home, his car and his hard-earned life savings were all at risk.
Protect Yourself From These Four Liabilities
As a business owner you know you have to deal with risk. A number of scenarios can put your assets in grave danger. Claims can come from at least four different areas;
- Employee negligence
- Debts due to vendors
- Product liability
- Professional liability
Planning ahead is the solution, and having insurance to satisfy a portion of these liabilities is only the start. Setting up the right legal vehiclesbefore claims arise limits the business claims to business assets. Your hard-earned personal assets are protected from liability.
Enhancing Your LLC is Mission Critical
Limited liability entities come in several different forms. The most common are corporations and limited liability companies (LLCs).Combining a trust with a limited liability entity offers better overall asset protection. Corporations and LLCs accomplish asset protection because they limit a creditor’s claims to only the assets of the corporation/company. However, this protection is only available if the corporation/company actually operates as a separate entity, and if appropriate insurance levels are maintained. If a creditor is able to show the entity is merely an alter-ego of its owners, and if there isn’t enough insurance in place to satisfy the creditor, the creditor may be able to “pierce the corporate veil” and reach beyond the corporation’s assets to the assets of the owners. This is why using additional asset protection tools, such as trusts, is vitally important.
Not All Trusts Are Created Equal
In many states, revocable trusts provide very limited asset protection and generally the limited assets protection offered is limited to a married couple while both the husband and wife are alive. Irrevocable trusts, however offer much stronger asset protection. Here's the rule of thumb; whatever you don’t want your creditors to have access to, you yourself also can’t have direct access to or direct control of. Depending on the type of asset (real estate and other non-liquid assets versus stocks, bonds and other liquid assets), different irrevocable trusts may be used for the best mixture of asset protection and control.
Plan Your Asset Protection Strategy Now
Planning ahead for protection from creditors, predators, lawsuits and bankruptcy is critically important for business owners. These strategies require planning before your issues arise as state laws allow creditors to satisfy claims from assets transferred to an asset protection vehicle while known claims are pending. If protection from creditors, predators, lawsuits and bankruptcy is important to you, consider combining trusts with limited liability entities now before it is too late.
Brian G. Quinn is an Attorney with the law firm of Quinn & Banton, L.L.P. in St. Louis, Missouri. If you are interested in learning more about protecting your business using legal strategies, please feel free to contact Brian at 636-394-7242 to schedule a consultation.