Is my business really protected

by Tim Foster

Hopefully, by the time you read this it’s not too late for you and your business.

"Why didn’t anybody warn me about this? I thought I was protected from this type of thing. That’s why I incorporated. The legal system is not fair…I hate attorneys!"

Hopefully, by the time you read this it’s not too late for you and your business. Procrastinators pay a heavy price. You have worked too hard for your business and family to put everything you own in the hands of fate. Those who plan are protected and love their attorneys, the others simply need someone to blame. Which one do you want to be?

I continue to come across business owners who believe that operating their business as an incorporated entity automatically protects their personal assets from business creditors. If your attorney has failed to alert you to the pitfalls of improper asset protection planning, for both business and personal assets, don’t be surprised. The practice of most attorneys is more reactive than proactive. An attorney will be there to defend you when an action is brought, but at that point it’s too late. The facts as they existed are frozen in time and it’s too late for planning. Instead, you will fight an uphill battle for survival.

What is your goal? Protect personal assets from business creditors and protect business assets from individuals suing you and your business for wrongful acts by you and your employees. Effective, thorough and well drafted documents are more critical everyday as results-oriented judges and juries are constantly expanding theories of liability. Remember, thanks to contingency fee arrangements, the attorney that brings the lawsuit against your business will pocket a sizeable percentage of the claimed damages. After receiving the highest award possible, he or she will attack your asset protection plan in order to satisfy the judgment claims with business and personal assets. Are you prepared to survive litigation?

Certainly when you combine the resultsoriented judges and juries, contingent attorney fees and the lack of effective planning by business owners, it’s easy to understand the explosion of this type of litigation.

In reality, the desired outcome of effective asset protection planning should not be winning the lawsuit, but preventing litigation in the first place. A well structured asset protection plan that leaves insurance as the only recourse will likely lead to a quicker and less costly settlement.

You must be educated and trained
If you do not respect the corporate entity, no court will force an adverse party to respect it either. Factors by which courts have set aside the corporate form include:

• Failure to adhere to corporate formalities. It is your obligation as the officer of the corporation to conduct shareholder meetings and update the corporate minute book.
• Commingling personal and corporate monies and assets.
• Lack of adequate capital.
• A misrepresentation that misleads a third party to believe they are doing business with the business owner in an individual capacity.

It is important to point out that inadequacy in any of the factors will not lead a court to instantly set aside the protection of the corporate form. One of the few consistencies in the case law, in this area, is that the courts generally seek to prevent a situation where strict adherence to the corporate form would result in an injustice to an innocent, harmed party. Therefore, the items above might not be fraudulent independent of other facts, but when analyzed in connection with other factors, they provide supporting evidence for an argument of fraud.

As a business owner, you must not allow sloppy corporate governance to provide the building blocks that permit a court to rationalize an adverse finding against you personally. Juries can become emotionally tied to correcting, or punishing, a perceived wrong and may simply look for facts to support such a finding. Would the way you operate your business allow a court to pierce your corporate veil?

Number one fallacy – ‘My insurance is my asset protection plan’
Don’t be foolish and think that the only planning you need is to have a lot of insurance. Insurance litigation can be a nightmare for the business owner and the last time I checked, the insurance industry is a for-profit business. Even if you pay your premiums faithfully, the insurance company will send an investigator to find a reason to limit their damage after any claim. Simply put, they will attempt to claim that you, the business owner, are to blame because you failed to have, or enforce, adequate employee policies and procedures. The position would likely include an argument that you had an obligation to control certain employee actions and failed. For instance, a finding that your employee was acting outside the scope of his assigned duties (running a personal errand or engaging in drugs or alcohol while operating a company vehicle) might enable your insurance provider to walk away from the claim or reach a settlement for an amount far less than the awarded amount. What’s next? The attorney will test your asset protection plan and pursue your business and personal assets. To be clear, insurance is a required part of operating your business, but effective planning includes insurance and a comprehensive asset protection plan.

Estate planning’s role in asset protection—your comprehensive plan
A proper asset protection plan includes business assets, personal assets and estate planning. Remember, a will is not an estate plan. A will is a directive to move assets upon your death and an estate plan is to move assets during your lifetime for the purpose of minimizing the estate tax. Through estate tax, the government will again tax your accumulated, after tax wealth and those rates can be as high as 45%. If you haven’t completed your estate planning with an attorney specializing in this area, do it tomorrow! Procrastination in this area will be unbelievably expensive. Your estate planning must include your life insurance and an accurate value of your business. If you are simply too busy to properly plan now, just make sure you have everything completed 60 days before you die. Good luck in determining that date.

Tax rate—the need for planning Think about it. You are in business as an SCorporation to avoid corporate level tax. The business earns $100.00. To put that in your pocket, you must pay employee and employer level payroll tax–15.3%. Your remaining $85.00 is then subject to your personal tax rate—35%. You now have $55.00 in your pocket. Do you dare spend it and reduce it further with sales tax? No, you decide to save it. If you die tomorrow with that $55.00 in your pocket, the estate tax can tax an additional 45% from you and your surviving family members. You now pass on $30.00 to your surviving spouse after passing $70.00 to the government in the form of taxes.

If that doesn’t offend you – just keep on doing what you’re doing.