In my last blog I discussed dreaded idea of being found liable for some injury or harm caused to another person. Liability means your assets, or your company’s assets, are going to be used to make the harmed individual whole. In other words, you are going to pay for the injury. Broad exposure to unlimited liability can bankrupt you. I suggested the use of an LLC to protect both business and personal assets because limited liability companies compartmentalize your exposure limiting it in many ways.
I also introduced the concepts of outside and inside liability. Lawsuits that have a direct relationship with a company are considered inside lawsuits. For instance, a rental property owned by a LLC that is sued due to some harm caused on the property is an inside lawsuit. The injured party will sue the company that owns the property. In that situation all the inside assets (assets owned by the LLC) could be judicially liquidated and ordered to pay the damages of the injured party.
In the example given above, assuming the owner of the LLC was not personally negligent, the only assets available for judicial liquidation and collection by the injured party would be the assets of the LLC itself. The owner’s personal assets and other corporate assets are outside assets. These outside assets are not attachable by the judgment as they are not a part of the company where the injury occurred.
So, what if the company where the injured party is doing business has no assets and the owner is not personally negligent? The injured party may still acquire a judgment for collection, but there are no assets available for collection. The injured party cannot collect. This is the position you want for your company.
A wise corporate structure is one that will have the public doing business with an operating company that owns little to nothing. The equipment and real property needed to operate the operating company will be owned by other limited liability companies which will lease these assets to the operating company. This keeps any potential lawsuit or judgment as an outside lawsuit relative to the equipment and real property. In other words, the equipment and real property are not at risk even though used in the business where the injury happened.
The purpose for these structures is to encourage property owners to put their capital to work while limiting the personal risk. It is good for the economy when entrepreneurs put their assets to work. These structures are obviously good for the owner of the company, but can be bad for the injured party. Responsible companies should carry liability insurance which will address the harm to injured parties without the loss of the capital ventured. I do not in any way encourage or suggest business owners should ignore the harm their business could cause. This is what insurance is for. At the same time, no smart business owner should put his wealth at risk without limiting the liability.
A good rule for corporate structure is to keep the liability inside the company and keep the assets outside the company.
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 Three and further discussions about protecting your assets with a limited liability company.