Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

How to insulate your business from lawsuits

- by Alan Duvall 

Published in Dayton Daily News March 12, 2006  

Sadly, every small business owner is all too aware they are only one lawsuit away from fiscal disaster.  This unfortunate reality forces owners to construct legal firewalls to protect business and personal assets from legal assault.

Total insulation is never possible – The ultimate objective is to build a labyrinthine system forcing plaintiffs to battle step-by-step through a series of legal barriers to seize assets. 

Business insurance is the obvious first layer of protection, but pay attention to policy details.  Fraud & intentional torts are probably not covered.  Be especially careful to examine “timing issues” (such as time of tortious event or filing of legal action) when switching insurers.  Businesses may find neither the prior nor new policy covers a legal action occurring within a time frame.  

Personal umbrella insurance policies cover business owners personally for any lawsuits falling between the cracks or exceeding policy limits of front-line insurance.  Umbrella premiums tend to be very reasonable and a good investment.  

Formation of corporations or LLC’s can protect owners personally from company lawsuits (in the absence of intentional torts by owners) but are not of much use to professionals such as attorneys, physicians or CPA’s.  

Business owners should examine company balance sheets to identify excess assets or real estate.  Spinning off such assets into separate companies may be a wise option. 

For example, real estate could be placed in a separate company to be leased to the same-owner’s operating company.  Such division could protect the real estate if the operating company is sued, or correspondingly, the operating company if the real estate business is sued.  

Alternatively, a holding company with minimal assets could own the stock of, say, an operating company, a real estate company and even a company with excess assets such as cash/investments.  

Pension assets should be maximized since they are theoretically safe from both business and personal creditors.  Many business owners even place ownership of excess personal assets in the names of spouses (Hopefully, their marriages are solid.). 

Do not wait until the legal Huns are at the gate before building property fortifications.  Advance planning is essential to victory in this perpetual war. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.