From start up to mature businesses, there are generally five major concerns for the business owner: liability, financing, management, continuity and taxes. In today's litigious society, too much attention is usually given to taxes and and not enough attention is being given to liability planning. Here are liability planning ideas to consider.
Business Structure. Potential creditors come in two types: inside creditors and outside creditors. Inside creditors are generally your employees, customers, vendors and lenders. A corporate business structure (C-Corp, S-Corp, or LLC) generally shields the business owners personal assets from claims of inside creditors, limiting the owner's exposure to the amount invested in the business. Two exceptions being that a professional is not shielded from malpractice liability and if any business owner fails to observe the formalities of running a business, the creditor may be able to "pierce the corporate veil" and go after personal assets. Partnerships, unless they are limited partnerships, and sole proprietorships do not offer this protection from inside creditors.
Outside creditors are generally the business owner's personal creditors such as the person who slipped and fell at a house party or the other car owner in an auto accident. For them, a beach rental condo or a nice fishing boat used in a sole proprietorship business is an attractive and easy asset to go after. Shield that pretty bauble with a limited liability company that uglies it up by limiting the creditors ability to take it.
Placement, Titling. Assets that can't be shielded by business structure include the business owner's home, retirement savings and other personal assets. Shield them with proper placement and titling. In Florida, homestead laws protect an unlimited amount of home equity from creditors making luxury homes an attractive place to bury money. Florida statutes even provide top tier protection for IRAs, 401(k)s and other tax-qualified retirement accounts. Annuities and other assets may require a little pre-planning to be fully shielded, which can be as easy as creating a retirement goal plan with an attorney or financial advisor before the annuity is purchased. And, even if a creditor succeeds in getting a judgement against you, talk to an attorney before cashing out your annuity, IRA or other assets to pay off the creditor.
Insurances. Exposures that can't be eliminated by business structure or placement and titling can be cost-effectively managed with proper insurance coverages. For the business owner personally, that often involves three well coordinated policies: property/casualty or homeowner's insurance, automobile insurance, and an umbrella policy. Business related policies must also be well coordinated to provide an adequate shield. Policies to consider include malpractice or sole-proprietor insurance, general liability, data breach, worker's compensation, commercial premises, and business income insurances.
Equity stripping and other asset protection liability planning strategies should also be considered. Discuss the pros and cons of the above strategies with an attorney before you decide on a course of action. Then, periodically readdress asset protection liability planning with an attorney to ensure it continues to meet the needs of the business and your needs as the business owner. To talk with an attorney about this type of planning, call us at (904) 705-7355.
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