Limiting Personal Liability

      A discussion about ways to protect your personal and business assets against legal liability. October 13, 2008

I started my business - a sole proprietorship - five years ago at age 24. My wife and I have been very blessed over these last few years and we've been able to buy a small 40 acre ranch that I run my shop from, and we own it outright and have some dough in the bank. Back when we started this thing, we didn't have anything to lose, so I wasn't too concerned about liability. But now that we have something, I worry about someone coming after it. I carry insurance for the business and property. I've never had anything happen, but I have fears about an accident in the work truck or by some freak thing a cabinet falling off the wall. Obviously we do everything we can to be careful, but in this world weird stuff happens.

What is the best way to protect your personal assets - incorporate? Anything else, besides more insurance? My wife and I figure about 25% of what we make already goes to insurance in one way or another (house, business, health!, life, car, disability, etc.) - it's nuts. I hate that our world seems to be run by lawyers, but after you guys, that will be my next stop - talking to a lawyer about this.

Forum Responses
(Business and Management Forum)
From contributor M:
Go to your lawyer and your accountant in that order, or maybe schedule a meeting together. I have an LLC and am incorporated. This is serious stuff. Getting it right is very important.

From contributor C:
While you are talking to the professionals mentioned above, ask about an Umbrella Policy. You can get several million dollars worth of coverage for well under a thousand a year. Probably even less than $500. It covers a lot of personal liability stuff. Once people know that you have assets worth stealing, some will try to do just that.

From contributor B:
I once met a guy in the woodworking business who lost 2.5 mil to a kid who hurt himself climbing over a pool fence. Go figure. He had the money so they went after it.

From contributor T:
You should read Tortilla Flat by John Steinbeck. He writes about this.

From contributor A:
Typically they recommend an LLC for your public business. Some people who either have lots to lose, are paranoid, or need other ways to shelter funds and assets for other reasons also consider Nevada C-Corps. But these are an additional measure and are not public knowledge and you should still be LLC.

From contributor N:
If you have a good accountant, I would start with him and then go to the lawyer. I imagine they will recommend either an S-corp and or an LLC. If you choose S-corp, you need an accountant and a lawyer that work well together so they can make your year-end meetings easy. You need to be cognizant of the tax benefits/costs and it needs to be based on your long term goals. You may want the ownership of the shop building in an LLC that leases to the S-corp. Also ask about signing personal guarantees at some point. Find out what will get you the most tax bang as well as protecting you.

From contributor V:
In addition to all that has been mentioned, make sure your house/ranch is registered as a homestead. Make sure the liability insurance on the business is good.

From contributor R:
In IL, an 'S' corp will help with taxes; its asset separation/protection is limited (for what it's worth, and as accurate as it may be).

From contributor W:
After incorporating, shop around for lower insurance rates. After awhile, you will find a hungry, ambitious agent who can give you incredibly good rates once you start signing up all your business and personal insurance needs with them. This is a relationship worth developing, and can cut your costs dramatically.

From contributor O:
This is a good topic, and one which we find that not everyone addresses. You definitely need to review this with your attorney. A few of the issues you need to discuss with the attorney include:

- How to protect your personal assets and limit personal liability.
- Discuss whether it is best to form an LLC or a corporation.
- Make sure that you understand what is required to separate the business and personal issues.
- Discuss if you can do anything that helps to limit your liability for work previous to the change in business structure.
- Review your standard proposal documents and ask for input, specifically concerning liability. They should be able to help you with liability exclusions.

From contributor G:
The best policy, in my opinion, is the "empty pocket" status. The more insurance you have, the more likely you are to get sued. Attorneys won't come after you if you have empty pockets. Look into what is called "common-law trust", aka "Massachusetts Trust", aka Unincorporated Business Organization.

You really need to do your own homework on this matter, as only you know how much money you have at risk, only you know about your children and their futures, etc. My advice is to stay away from statutory-law attorneys (which is nearly all of them) and all CPAs. They are all a part of the system - the same system which you are trying to protect yourself from.

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