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INTRO: We live in a world that loves to litigate. Protecting yourself and your assets is therefore of the utmost importance. As this blog post will explore, insurance coverage helps, but you should consider the limited liability benefits of forming a business entity – especially if you own any investment property or small businesses. Think of insurance coverage as the foundation of your protection, but remember that the four walls protecting you from the litigious outside will be the incorporation of your assets into a business entity.
In our litigious society, a fear of lawsuits is prevalent and understandable. People are always at risk of committing negligent acts and omissions that cause, or allegedly cause, harm to others. Of course, a much bigger problem arises when the person who is alleged to have committed such negligent act or omission has no applicable insurance coverage.
Many people, including knowledgeable professionals and business owners, are not well informed about detailed aspects of their property and casualty (P&C) insurance coverage. I encourage you to have detailed discussions with your P&C insurance agent about whether or not you have personal and business policies containing: a) appropriately broad scope of coverage for the areas in which you have risk; b) reasonably high coverage limits; c) optimal deductibles; and d) umbrella coverage under which you cost-effectively boost your limits.
The challenge is that even people who have terrific insurance policies have some risk because every insurance policy contains exclusions. Thus, everyone, particularly those who own a small business or a real estate investment property, has gaps in protection. Such people are exposed to unlimited liability for claims, lawsuits, and damages that may arise out of such business or real estate investment venture. If someone files suit and obtains a judgment against the owner of such business or investment property, the owner’s personal and other (unrelated) business assets are vulnerable – available to satisfy the judgment.
One can go a long way toward filling these protection gaps by forming one or more business entities, such as a limited liability company (LLC) or corporation. By properly forming, capitalizing, and operating an LLC or corporation in connection with a business or investment property, the owner is legally entitled to limited liability. This means that a potential judgment creditor can only obtain a judgment against the LLC or corporation; not the owner. Consequently, the only assets available to satisfy such potential judgment are those owned by the LLC (i.e. not the owner’s personal or unrelated investment assets).
PART TWO: Suppose that someone who prudently owns his business or property in a LLC or corporation is sued and the claim isn’t covered by insurance. Find out what can be done in Protect Your Assets – Before It’s Too Late – Part Two.
This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.
Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.
ESTATE & TRUST ADMINISTRATION: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on a Revocable Living Trust, “Summary” Estate Administration, Trust/Estate Beneficiary Representation and Will & Trust Disputes.