Complying With Laws That Provide Asset Protection

You business can be your greatest asset or it can be your greatest liability, depending on how you manage it from an administrative perspective. Despite the fact that judges can and often do disregard the corporate veil, there are specific actions you can take to ensure that you’re taking full advantage of asset protection laws and minimizing your exposure before going offshore.

Asset Protection Law

Asset protection law is not a finite area of law. To take full advantage of asset protection opportunities, one must make use of corporate, estate, trust, and employment laws, to name a few. With respect to corporate law and the issue of choosing a business entity, one major risk is that a court could “pierce the corporate veil” and pursue individual partners, shareholders, or members to satisfy creditors.

To fully understand this concept, we must draw a distinction between inside and outside liabilities. For purposes of this discussion, inside liabilities consist of those liabilities directly incurred by a business entity and for which the business entity alone should be responsible, in theory. Outside liabilities are those incurred by individual members, partners, or shareholders outside of the guise of corporate action.

Corporate Laws That Protect Your Business

In theory, corporate asset protection law protects shareholders, partners, and members of business entities from creditor claims vis-à-vis inside liabilities.  In other words, inside liability creditors should only be permitted to look to the assets of the business entity to satisfy their claims. Thus, one might conclude that having a limited number of assets in any particular business entity is an easy way to take full advantage of domestic asset protection laws.  Unfortunately, undercapitalization (and yes, the concept is as amorphous as it sounds) is a factor that courts can consider when deciding to pierce the corporate veil—when deciding whether it is “appropriate” to look to the assets of individual shareholders, members, or partners to satisfy corporate obligations.

Although veil piercing laws vary according to jurisdiction, there are a few things you can do now to minimize the chance that a court will see through the corporation in the event that your business is sued:

1. Make sure that your business entity is properly formed with the appropriate organizational and operational governing documents. If your business is formed in a state other than the state where it primarily operates, check with an attorney as to whether your business needs to be qualified in the states where it has a presence.
2. Document business transactions and keep records of internal business meetings. Always use the name of your business entity (and not your name) when transacting business and in advertising (unless you are a professional such as doctor, dentist, chiropractor, lawyer, etc.).
3. Maintain a separate checking account for your business and have title to all business assets.  Treat your business as if it is a separate person with a desire to maintain its own autonomy and not as an alter-ego of yourself.

In addition to maximizing the effect of asset protection laws, business owners should consider and buy all the insurance they can afford after a reasoned cost-benefit analysis.  Such insurance should include general liability, professional liability (errors & omissions or malpractice), officer and director, workers compensation, and property damage.

If you have been a business owner for any amount of time, you have probably heard all of the above advice a number of times, but it is important enough of an issue to be revisited from time to time to ensure that proper systems are in place.  It’s the only way to ensure that you are fully leveraging asset protection laws in your favor.