Small business owners more often than not operate their business completely unaware of the personal liability hazards. Exposure to lawsuits can force a business owner to his or he knees. There are risks such as contract disputes and torts (actions and acts that result in a damages) from employees and customers. So, we will discuss some key small business owner asset protection strategies. Avoiding daily liability exposure and lawsuit risk as a requires more than just forming a limited liability company or corporation. In also include setting up a complete asset protection plan.
Small Business Owner Asset Protection Tips
A properly established, funded, maintained and operated business entity is the first step in creating a legal barrier between business liability and your personal assets. By all means, do not operate as a sole proprietorship or partnership. They are like using tissue paper as a bulletproof vest. The legal bullets will sail right through.
A corporation or LLC creates a separate legal person. Let’s look at the sole proprietorship vs. LLC and corporation for example. The LLC and corporation are separate from those who own and manage them. The sole proprietorship is not. Both corporations and LLCs have annual requirements and operational formalities that owners must follow in order to preserve their limited liability protection. This includes, but is not necessarily limited to, annual government renewal fees, maintaining a registered agent and holding annual corporate shareholder and director meetings.
Understanding Contract Liability
Unless you understand the nature of contract law, it is impossible to successfully avoid risk. Even with proper planning it is hard to sidestep unlimited personal liability for business debts not done properly. Specifically, exceptions exist in both tort and contract liability. You can avoid these exceptions. With a proper strategy, business owners can preserve legal protection, thus separating his/her personal assets from business liabilities. One can do this through more advanced asset protection strategies. Plus it is important to have a general understanding of contract law authority as well pitfalls that can result from torts.
In order to enter into a contract as a business owner, an acting agent requires express authority. The principal grants this permission in either verbal or written from. Verbal authority can get tricky in a legal situation. Written authority is preferred. The most common source of express written authority is from corporate bylaws and resolutions for corporations; an operating agreement and member or manager resolutions for LLCs (limited liability companies).
Implied authority and apparent authority are other forms of express authority. Although neither are verbal or written, these two can still land the business owner in legal liability. This is done through a binding business contract via authority under contract law; even if no actual authority exists.
Most business owners are blissfully unaware of contract law and tort claim liabilities. Both can expose their personal assets to monetary damage claims.
Avoiding Contract Liability
In order to greatly limit liability for torts and contracts, the small business owner needs to have an understanding of agency law. An agent is a representative of the small business owner. The most common form of agency is the employer/employee relationship.
Legal entities, such as corporations and LLCs are separate persons in the eyes of the law. However they are inanimate and require action through agents. To preserve the liability protection afforded by your corporation or LLC, the small business owner must always act as an agent of the business. Act through the company, rather than personally. This includes agents of the principle, e.g. employees.
Improperly executed contracts can create unlimited personal liability. One way this happens is if the business owner enters the contract prior to the corporate entity’s formation. Another way is through failure to identify the principal and finally when signing the contract. Still another is through personally guaranteeing a business contract.
Careful business sense can help in avoiding contract exceptions. However, a solid personal asset protection plan is the only way to thoroughly shield your wealth from unnecessary business liability. This includes contract exceptions.
Avoiding Tort Liability
Every small business owner should set a goal to limit liability from torts in the business. Personal injury law is the best way to briefly define tort law. The best example of this is negligence. That is, or causing damages to property or injury to a person from careless action. When a tort is committed by an individual, s/he is liable to the other party.
The individual is always liable for his or her own actions, however when acting as an agent on behalf of a business, the business will get sued as well. There are two misconceptions with tort liability on both sides. The individual usually believes that while acting as an agent on behalf of a business principal s/he is not personally liable for damages. An employee conducting work tasks for the employer is an example. This is not true. The employer will be liable as well.
The business, or better yet, the insurance carrier of the business may cover monetary damages. That is, if the insurance policy covers the specific situation, and policy coverage is sufficient to cover all of the liability for damages. Insurance coverage does not relieve an individual’s personal liability. Plus, someone can always sue you for much more than your coverage limits. They may also take the valuable equipment and vehicles used in the business.
This situation is at its worst when the business owner (acting as an agent of the business entity) commits a tort. The result is double liability with individual responsibility and corporate responsibility. This is a potentially hazardous exception to a business owner’s liability limiting efforts.
The law can assign tort liability to a business owner without proving any wrongdoing at all. They do this through what is referred to as the “master-servant” rule of law. This means that the courts can automatically hold the business owner liable for a tort caused by an acting agent. Being a careful business owner makes little difference when it comes to defending against such claims.
Asset Protection for the Small Business Owner
Small business owners should be especially protective of their personal assets from inside and outside business liability. The only true protection comes in the form of a personal asset protection plan. Often this includes the use of domestic and international legal tools such as LLCs and asset protection trusts, which you can read more about on this site. For a free consultation, call one of the numbers or use the inquiry form on this page.