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Protecting Your Business - Limit your liability

  Sanjiv Gupta CPA  Published 
Protecting Your Business - Limit your liability

This is no joke. Bad things can occur even to the kindest of people at any point in time. They do not have to be negligent or irresponsible to be sued. Therefore, for business owners or any individual to protect what they have, it is crucial that they take on defensive measures. This makes ir harder for creditors to obtain their assets just in case they lose a lawsuit when a judgment is filed against them. This also protects them when they find themselves bankrupt, not by their own doing but because they were forced to do so.

  1.  Resort to Business Entities

Entrepreneurs of any kind must separate their personal assets from that of their business. If these specific legal steps in creating the business as a separate entity, corporation or LLC is neglected, the owner will find him or herself in dire consequences. It may even cost them everything that they own and all that they worked hard for.

Here are business entities worth considering:

* Sole Proprietorships. These offer no limit on the individual's liability. The downside to this is that a single mistake can easily cost the individual his or her home, depending on the state that he or she resides.

* General Partnerships. These are the worst option. If the business partner has personal disputes that have nothing to do with the other partners, everyone can lose the lawsuit because all the partners are joined by the hip. Usually, lawyers come after every partner because of one's action whether it be concerning the business or the personal lives of those running it.

* Limited Partnerships. These can help limit the liability of the individuals. If they invest as limited partners in partnerships, then they cannot be sued for anything that is more than what they possess and have invested in the company. The worst scenario is when the investments are totally wiped out. Lawyers cannot come after every owner and maximize the claims against the corporation. The kicker is that the owners cannot completely participate in running the business. If this is one, then the individual who does so is the general partner. Therefore, his or her assets are fair game.

* Corporations. These provide excellent protection of the owners' assets. This come with the exception of cases when it comes to fraud. Therefore, if the person fails to pay the payroll taxes to the IRS or they do not treat the corporation as separate entity for themselves, then these personal assets cannot be stripped away from them. This is in the event that the business also loses the lawsuit. Entrepreneurs should know that there are two kinds of corporations: the C Corporations and the S corporations. These are taxed differently. Entrepreneurs should also know that they have varying restrictions when it comes to ownership. However, both of these provide the same asset protection for the owners.

* Limited Liability Companies. Limited liability companies provide the protection of the business owner's assets against lawsuits hurled to them. However, there are few restrictions on the ownership for LLCs than with S corporations. They also let their owners choose whether they would like to file the federal taxes as some form of partnership or corporation. There is a major advantage that the LLCs have some jurisdictions and this because they charge their order protection. If the corporation loses the lawsuit then the judge can award the number of shares to the business and award this to the creditor. This also gives them access to the books of the business. However, with the LLC, the plaintiff gets an interest in the membership. They also cannot force the distribution of the cash but they are also taxed once this has been received. This is why they regard it as a "poison pill." Despite the name though, it also helps in preventing the lawsuit and settle these on the favorable terms.

  1.  Business Owners’ Insurance

There are professions that generate vast exposure to liability when compared to other businesses. If the individual is a real estate agent, financial advisor, gynecologist or any professional in various fields that generate lawsuits for malpractice, they need to have their errors along with their omissions coverage paid up. If they cannot afford to do this, then they can invest this in extra or even in expanded coverage. They should also not stop there. They need to enact this in different kinds of coverages:

* Homeowners Insurance. This help in covering the individual is someone is hurt within his or her property. The individual must choose a deductible that can cover savings and also make sure that the liability coverage is adequate just in case someone gets hurt within their property and they are sued by this.

* Commercial Liability Insurance. These kinds of insurance protect the business if someone is hurt on the premises and is injured as the result of the action by the employee.

* Worker's Compensation Insurance. These are mandatory and carried through by most jurisdictions. The worker's compensation also protects the workers along with them ensuring that there is enough liquidity that comes in place in order to take care of the employee when they get hurt on the job. Their expenses pretty much do not come out of their pockets.

* Auto Insurance. Individuals must not settle for the legal liability coverage at its most minimum. Instead, they should always check if they can afford the additional coverage. Individuals must buy additional coverage when looking into insurance so that they are protected just in case their vehicle is involved in the accident that results in a lawsuit. It is a general rule of thumb that they are made liable to coverage equal to the total assets.

* Umbrella Coverage. These are back up insurance that is used in the situation where other coverages are regarded as inadequate. Just in case the individuals' auto, liability or homeowners coverages are all exhausted, then the umbrella coverage eventually pays the benefit that is limited to the policy. Take this example. If the individual has $1 million for auto liability and is sued $2 million in judgment, then this umbrella policy eventually picks up an additional $1 million in terms of coverage. Otherwise, the plaintiffs can also start seizing the assets for the accumulated damages. These policies are underwritten for the amount of $1 to $5 million in face value. It is also usually quite affordable.

* Long-Term Care Insurance. These are the insurance the protect the individual against unexpected costs that are financially devastating. This can be in the form of nursing home care or in-home care for chronic ailments like dementia, paralysis, Alzheimer's, multiple sclerosis, paralysis, strokes, and spinal cord injuries just to name a few. Medicare does not provide coverage for these kinds of afflictions and a number of medical insurance policies also do not provide this. If the individual has no long-term care insurance, then they could be spending $200 for just one day at a nursing home. These expenses can drive them to poverty that it is enough for them to qualify for Medicaid. The longer the individual waits, the higher that the premium gets. Additionally, they can also develop an ailment that can preclude them from getting coverage or at least then make it expensive. Alternatively, it is important that the individuals consider the long-term care insurance for the parents if it will otherwise be on the hook for the expense.

  1.  Retirement Accounts Must Be Used. The Federal law provides asset protection that is unlimited for the ERISA-qualified retirement plans. It can amount to a total of $1 million in terms of assets just in case an event of bankruptcy occurs in the IRA. There are some states that proved more protection but there are also some states that chose to opt-out of the Bankruptcy Reform that was created in 2005. The federal bankruptcy exemptions can also exempt this to a decreasing amount.

Individuals must check the laws of their states in order to see how protected they are just in case these funds are provided to their accounts. They can also speak to their attorneys as long as the latter is familiar with the laws that are indicated in their state. They can also determine whether the creditors can choose between the federal and the state exemption amounts.

If the state has generous exemption then they can consider moving the cash that they do not need until they reach the age of 59 1/2 into their protected entries. They should also remember that there will be a restriction on the annual contribution limit and this varies depending entirely on the kind of retirement plan. If the individuals go beyond this limit or they are able to withdraw the funds prior to the age indicated, then they can be assessed for penalties. The retirement accounts are also excellent transport to protect their long term savings. They can also provide substantial tax benefits and are needed to thoroughly and understand then use this with care.

  1.  The Exemptions in Homestead. There are some states that provide tons of protection to the home equity. This means that if the individual declares bankruptcy then the law also prohibits the courts in awarding the home equity to the creditors. There are some states that include Florida and Texas. There are also state laws that protect the unlimited amount that is the home equity. Other states can also provide quite a little protection in the events of bankruptcy to home equity.

Individuals must check the laws in their states. If the state is able to offer generous homestead exemption, then they should consider contributing extra to the mortgage payment principal in order to protect the funds. The principal contributions of the housing market along the vagaries are also subject to risk if the individual loses access to the equity. The cash of the property value often falls.

Alternatively, if the state is able to provide a homestead exemption that meets the minimum requirement, then they can also accelerate the mortgage payments and then also pay the down principal that can also make sense if they are looking to protect the assets along with the creditors.

  1.  Obtaining Titles. Take this for example. Check how an individual's home is titled. If the individual owns the home with his or her spouse as the tenants, then both the individual and the spouse own an interest for the home that cannot be divisible. If only the individual is sued, then the creditors can also not force the other spouse to sell for his or her share of the interest in the house. The interest is indivisible, therefore this also protects the home equity where the law eventually states the provision for the sufficient homestead exemption.

Only a number of states has this kind of option available for them. It also applies to the personal residence and never does it apply to the investment property. There are other kinds of titling that also includes the tenancy as well as the joint tenants that possess the rights for survivorship.

The way that the property is titled can also profound the ramifications just so it goes with the event that the creditor can also make an attempt to obtain this. Individuals should speak to lawyers that are licensed in their state for the specifics that concern this kind of situation.

Individuals must not wait until the lawsuit is made imminent before they can even make any of these. If they do, then the court will only rule that the transfer of funds be conducted to a protected class. This is a fraudulent conveyance and the court may not even allow this transfer. This results to the assets being exposed.

The most important consideration is for the individual to not be a target. This can also be done by avoiding display the conspicuous consumption. This can also attract the trial lawyers and can also create the plaintiff's case where they would also otherwise pay for this.