“There are roughly 300 million Americans. Of these, over 1 million are lawyers. No other nation on earth has, or wants, this many lawyers. These lawyers work tirelessly encouraging and assisting Americans to sue one another.”
-Don Miller in op-ed to The Telegraph, “We Are the World’s Most Litigious Society,”
You might be a careful driver with good insurance. You might treat people fairly and with respect and enjoy excellent relationships. You might avoid conflicts and risky behavior like the plague, and you might not even own your own business.
It doesn’t matter. You can still be sued for everything you’ve got.
There is always a risk of being sued. Beyond the cliché of the car accident lawsuit (a real possibility that could happen to anyone), consider these other risks:
Personal Liability Risks:
- Divorce. It could never happen to you… until it does. Too many people intermingle inheritances and other windfalls right before their trusted partner runs off with someone new… along with half of their former spouse’s gains. And retirement funds are not protected from divorcing spouses, unlike other creditors.
- Social Host Liability. If you serve friends alcohol at your home and one of them gets in an accident on the way home, you can be sued.
- Vicarious Liability and Employee Actions. You can be personally sued if your minor child, business partner, or employee are in an accident or cause injury or damage.
- Medical Bills. Medical issues are a top cause of bankruptcy. Even when people have good health insurance, a severe injury or illness can wipe them out. And if the person is unable to work for some time, they can exhaust disability income and even lose their employee-sponsored health insurance.
- Debt. If you lose your source of income and default on your debts, your creditors can come after any unprotected assets, sometimes forcing consumers to seek bankruptcies. (For those who wish to avoid bankruptcy and/or who do not qualify for chapter 7, we recommend a bankruptcy alternative. )
- Foreclosure. If you cannot make your mortgage payments, the bank can seize your property through foreclosure. Federal law limits liability from debt secured by your personal residence. However, no such restrictions apply to commercial loans. A commercial foreclosure could put other assets at risk unless you have contained the risk in advance.
Professional Liability Risks:
- Trademark Infringement Lawsuits. This is all too common, and trademark searches don’t always ferret out the sticky situations beforehand. If someone thinks your business or product name is too close to theirs (even if you were unaware of its existence), or your jingle, mascot, or customer process looks too similar, they may sue for damages.
- Work-related Vehicle Accidents. If you have company cars, trucks, or even use drivers for deliveries in their own vehicles, people will come after you or your insurance company for damages and injuries caused by employees.
- Workplace or Business-Related Injuries. You likely have worker’s compensation insurance to cover for medical bills and lost wages if an employee hurts themselves on the job. (If not, you must!) But are you prepared if a customer slips and fall on a wet floor and sues you and your business for an injured back that puts them out of work? And if a customer becomes injured or ill while using your product or after dining at your establishment, you may also be held responsible.
- Breach of Contract Claims. Even well-intentioned business owners sometimes fail to fulfill on promises. If you are doing business under the terms of a contract and fail to live up to those terms, you could be made liable for damages.
- Employment Discrimination. Justified or unjustified, a well-meaning hiring manager could expose you to a discrimination suit just by asking the wrong question in an interview, or firing an employee in the wrong way.
- Sexual Harassment Accusations. Just because you believe the lawsuit is without merit doesn’t mean the plaintiff won’t go forward with the case.
- Then there’s Malpractice Suits, Errors and Omissions Claims, and the list goes on.
Even if you have done nothing wrong, be warned: there are people who look for opportunities to make your assets theirs. If you’ve got significant or visible assets, you are even more of a target, as unprotected assets are what makes a lawsuit worthwhile (even if it’s settled out of court). And unfortunately, the more wealth you have, the bigger a target you are.
Avoiding displays of conspicuous consumption is a sensible place to start. However, there is much more you can (and must!) do to protect yourself from lawsuits and judgments.
In this post, we’ll review strategies to protect your assets.
- Insure Yourself and your Business Carefully and Adequately.
Insurance is an excellent place to start, because in many cases, it exists precisely for the purpose of protecting you from lawsuits and liability due to accidents and all kinds of unexpected occurrences.In addition to adequate personal insurances such as car, home, health and life, you’ll want an umbrella policy, as discussed in our last post on insurance. Umbrella policy coverage can raise your personal liability protection as much as $5 million beyond your homeowner’s and auto insurance limits very affordably.If you own a business, you must also have adequate business insurances, such as:
- Errors and Omissions (if applicable)
- Commercial Liability
- Worker’s Compensation (mandatory in most states)
- And if you own or lease a building or vehicles for business, those must also be adequately insured before you open for business.
- Separate your Business Assets from Personal Assets with Business Entities
If you own a business or participate in entrepreneurial pursuits of any kind, it’s important to separate your personal assets from those of your business. Without a separate business entity, such as a corporation, limited liability company (LLC), or limited partnership, you could be at risk of bankrupting yourself over even unfounded claims.There are a number of entities to consider:
- Sole Proprietorships. Sole proprietorships offer no limit on personal liability. Depending on the state you live in, even your home could be at risk.
- General Partnerships. General partnerships can actually increase your liability for your partner’s actions. Avoid them.
- Limited Partnerships. If you invest as a limited partner in a partnership, you can’t be held liable for more than what you have invested in the business. The downside is this: you can’t take an active role in running the business, or you are considered a general partner, and your assets are fair game. Family Limited Partnerships can be effective in some situations.
- Corporations. S corporations and C corporations provide excellent asset protection for their owners. They are taxed differently, but provide similar asset protection benefits. Unless you commit fraud (which can invalidate a corporation’s protection), your personal assets are protected, even if your business loses a lawsuit.
- Limited Liability Companies. LLC’s also provide asset protection against business lawsuits for their owners, with fewer restrictions on ownership than S corporations. They also allow their owners to choose whether to file federal taxes as a corporation or as a partnership.
- Holding corporations are a multi-entity strategy. They protect your most valuable business assets, including equipment, machinery or intellectual property. This allows you to separate business activities from business assets, significantly reducing liability. The holding company can own the business’s assets, and lease them to the operating company.
Confused about which business entity may be right for you? Check out this useful article, “Business Entities: Which One is Right for You?”
To Be Continued…
Next week, we’ll continue with the discussion about protecting your assets from lawsuits and judgments by covering
- Saving Money Safely
- Protecting your Home from Lawsuits and Creditors
- Protecting Your Investments and other Assets
- What NOT to do when someone threatens a Judgment
- and more.
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