How to Protect Business Assets From Lawsuits
You decide to start a business and are going to be smart from the get go.
You form a corporation to create a shield between the obligations of the business and your personal assets.
It's a nice start, but has one serious weakness.
Let us all chant the marketing pitch of the $199 incorporation sites on the web.
Incorporate and you will protect your personal assets from business obligations! Yes, this is true, but these sites utterly fail to mention that your personal assets are often the least important ones out there.
Simply put, what about your business assets? Let's assume I get into the field of plastics.
I open a business doing injection mold plastics.
This business basically makes molds of an item and then cranks out thousands upon thousands of the item in plastic form.
The business can be very profitable, but the machinery and software involved can easily run into the many hundred thousands of dollars.
When starting my business, I did what I thought was the smart thing and incorporated.
Hey, my personal assets are protected so what do I have to worry about? Well, over the years I've been adding new machines and even patenting new ways to create products through injection molding.
The total value of the assets in the business is well over three million dollars.
Everything is going well and then I get sued by a former employee.
She claims that one of my managers sexually harassed her.
I hire a lawyer and an investigation reveals she is telling the truth.
Even though I didn't know about the conduct, the corporation is now on the hook for millions.
I can't pay it, so we go to trial and lose.
She gets a judgment against the corporation for $5 million dollars.
Guess what happens next? The good news is my lovely home and cars are not at risk.
The bad news is all the software, machinery and patents of the corporation are.
This is really bad news.
Her lawyer can call in the marshals to haul off all the assets and auction them off until the total judgment amount is satisfied.
In the meantime, I am ruined.
In this case, incorporating did nothing for me other than protect my personal assets.
With the business wiped out, that may not mean much in a month or two when my mortgage goes into default and other bills are not paid.
Was there any way to avoid this problem? Sure.
You simply needed to form two business entities.
One would hold the hard assets such as software, manufacturing equipment and patents.
It would then lease these assets to the business that dealt with customers and had employees.
If things went south, the first business would just take back the assets and nothing would be at risk When creating a business entity structure for your business model, don't go cheap.
Think it through.
What do you really want to protect and what is the best way to go about it? Take the time to do it right and you can avoid nightmares down the road.
You form a corporation to create a shield between the obligations of the business and your personal assets.
It's a nice start, but has one serious weakness.
Let us all chant the marketing pitch of the $199 incorporation sites on the web.
Incorporate and you will protect your personal assets from business obligations! Yes, this is true, but these sites utterly fail to mention that your personal assets are often the least important ones out there.
Simply put, what about your business assets? Let's assume I get into the field of plastics.
I open a business doing injection mold plastics.
This business basically makes molds of an item and then cranks out thousands upon thousands of the item in plastic form.
The business can be very profitable, but the machinery and software involved can easily run into the many hundred thousands of dollars.
When starting my business, I did what I thought was the smart thing and incorporated.
Hey, my personal assets are protected so what do I have to worry about? Well, over the years I've been adding new machines and even patenting new ways to create products through injection molding.
The total value of the assets in the business is well over three million dollars.
Everything is going well and then I get sued by a former employee.
She claims that one of my managers sexually harassed her.
I hire a lawyer and an investigation reveals she is telling the truth.
Even though I didn't know about the conduct, the corporation is now on the hook for millions.
I can't pay it, so we go to trial and lose.
She gets a judgment against the corporation for $5 million dollars.
Guess what happens next? The good news is my lovely home and cars are not at risk.
The bad news is all the software, machinery and patents of the corporation are.
This is really bad news.
Her lawyer can call in the marshals to haul off all the assets and auction them off until the total judgment amount is satisfied.
In the meantime, I am ruined.
In this case, incorporating did nothing for me other than protect my personal assets.
With the business wiped out, that may not mean much in a month or two when my mortgage goes into default and other bills are not paid.
Was there any way to avoid this problem? Sure.
You simply needed to form two business entities.
One would hold the hard assets such as software, manufacturing equipment and patents.
It would then lease these assets to the business that dealt with customers and had employees.
If things went south, the first business would just take back the assets and nothing would be at risk When creating a business entity structure for your business model, don't go cheap.
Think it through.
What do you really want to protect and what is the best way to go about it? Take the time to do it right and you can avoid nightmares down the road.
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