Few businesses become successful without a solid plan. Many businesses plan for things like start-up expenses, overhead, retirement plans, equipment, construction, payroll, accounts receivable … the list goes on. Unfortunately, many business owners neglect to factor asset protection into their business plans.
• America is a litigious society. There are over 100 million lawsuits pending in the United States. In 2011, the average premise liability award was $1.94 million, and the average wrongful death award was $7.9 million (Verdict Search). Many judgments far exceed insurance coverage, leaving owners liable for large judgments not covered by their plans.
• Trial attorneys are one of the largest lobbyist groups in the country, and they have worked hard to advocate laws to increase the level of “vicarious liability” to business owners. This means that if there is an accident involving business property, an attorney will attempt to hold the business owner liable, even if he or she did nothing wrong. For example, in Clohesy v. Food Circus Supermarket, Inc., a grocery store owner faced a wrongful-death lawsuit because of insufficient security when a 79-year-old woman was abducted from the store parking lot and killed. The State Supreme Court held the owner liable, stating that the owner had a duty to provide security for its patrons.
• In light of these two factors, business owners are improperly structuring their businesses and needlessly putting their wealth at risk. Here are some examples:
1) Operating a business as a sole proprietorship may result in an owner being held personally responsible for a judgment against the business. This means that both personal and professional assets (buildings, equipment, homes, IRAs and other cash assets) may be vulnerable to seizure to satisfy a judgment creditor’s claims.
2) Some businesses operate in partnership, with one or more partners. This means that a mistake by one partner can result in the other partner being held liable for the action(s) or inaction(s) of that other principal. Being in business with others without legal protection is like riding an ATV without a helmet—it is, to say the least, unwise.
3) Some operate their businesses under one “all-inclusive” legal entity such as an LLC or a corporation. Placing the entire business operation under the umbrella of a single legal entity is comparable to placing all 401(k) retirement assets into a single company’s common stock. One failure and all could be lost.
State and Federal Law
Imagine the owner of a pizzeria is involved in a $5 million personal injury lawsuit resulting from a fatal automobile accident by one of the delivery drivers. Federal ERISA law protects most tax-deferred retirement accounts, but IRAs (Roth/Traditional) are dependent on state law. Ohio, for example, protects 100 percent of tax-deferred retirement plans from a judgment creditor, but other states offer limited protections (Arkansas, for instance, protects only $20,000).
Similarly, in Ohio any equity over $22,200 in a primary residence is unprotected by state “homestead exemption” laws. This means the primary residence may be seized and sold to satisfy a judgment. The point here is that every state has different statutory limits and protections. It is crucial that every business owner understands, and plans, for those limitations.
The Solution: Asset Protection
Asset protection is a specialized area of law where legal entities are put in place to protect personal and business assets from lawsuits. Most attorneys understand neither the principles nor the implementation of these strategies. The best way to protect assets is through containment and deterrence, and this is accomplished by separating them into multiple legal entities. This separation will help shield certain assets when others might be in jeopardy.
In fact, a fully implemented asset-protection plan is a serious deterrent to a lawsuit ever being filed. Since many lawsuits today are taken on a contingency basis, an asset search is one of the first things an attorney does before accepting a case. If there are few assets available to be seized, the attorneys will likely not pursue the case.
However, the time to act is now. An asset-protection plan must be in place before a lawsuit occurs, as any steps to rearrange assets after a potential lawsuit occurs can be ruled fraudulent.
Please remember, there is no single structure or entity that provides 100 percent protection. A layered approach, using a variety of tools, is the only way to protect the wealth it has taken so long to create. That’s why careful planning and advice are encouraged. Consult an asset-protection attorney and/or tax advisor before beginning the process.
Larry Oxenham, an expert with the American Society for Asset Protection, will give a seminar, “A Pizza Operator’s Guide to Lawsuit Protection, Labor Laws and Taxes,” on Wednesday, March 20, at Pizza Expo 2013.
For more details on International Pizza Expo 2013, visit www.pizzaexpo.com.