Have you ever been sued? Have you ever feared you were going to be sued? Have you thought about what you might do to protect your assets in the event of a lawsuit? Being found liable is a dreaded event in most situations because it could bankrupt you. Smart business owners use limited liability companies to protect their business and their personal assets.
Liability simply means you are responsible for some damage or injury and your assets will be at risk to pay someone back due to your actions or failure to act. Limited Liability is the idea that the responsibility you otherwise might be forced to accept is limited by some legality – in this case, the type of entity you choose. In this way, a person can sue and get a judgment against your entity, but she cannot come after you personally.
Obviously, the more you limit your liability, the better. Limited Liability Companies exist for limiting the invasion of your personal assets due to some injury or harm associated with your business activity. They also exist to limit the invasion of your business assets due to some injury or harm done by you but not associated with your business.
Another way to understand this is viewing the liability as inside or outside liability. For instance, suppose you are the owner of a widget factory (Widget Factory, LLC) and a lawsuit is incurred due to a defective widget, then your personal assets are typically not at risk in the lawsuit. The lawsuit is against the company that made the widget. The assets of Widget Factory, LLC are at risk in such a lawsuit. These assets are known as inside assets. This kind of lawsuit is known as an inside lawsuit. The injured party was doing business with Widget Factory, LLC and using a product made by Widget Factory, LLC. The harm or injury has some direct link to Widget Factory, LLC.
If a judgment is granted to the injured party, they may collect against all the inside assets. But what about your personal assets? Are they at risk? In most cases, they are not. Your personal assets are considered outside the company. There are instances where the outside assets are at risk. I’ll discuss that in an upcoming blog.
So, if you as the owner of Widget Factory, LLC are wise, you will keep the assets owned by Widget Factory, LLC to a minimum. The equipment used in manufacturing widgets will be owned by another Limited Liability Company (that you also own), which leases the manufacturing equipment to Widget Factory, LLC. Widget Factory, LLC should only own a small bit of inventory and parts. Widget factory, LLC bank accounts are kept low due to equipment lease payments and salaries of the employees at Widget Factory, LLC. Widget Factory, LLC might not actually be poor, but it needs to look poor by owning very little itself.
If an inside lawsuit occurs, the liability is limited to inventory and parts possessed at the time of collection. During the lawsuit, the inventory and parts can be used to fill orders. The proceeds from the sale of the inventory during the lawsuit may be used to pay employees and lease payments during the lawsuit. The amount of cash at any time should be kept to a minimum.
If you are in a position where you might be held liable for something your business does, you are in a position to need an Arkansas-based business attorney. A little bit of planning and thought about business structure could literally determine whether your business survives.
Stay tuned for Part Two and further discussions about protecting your assets with a limited liability company.
Have other questions? Check out our FAQ about LLCs.