Protecting your personal and business assets against liability risks and lawsuits has two key parts: setting up the proper legal structures that insulate assets from liability claims (as permitted by law) and taking steps to discourage lawsuits based on a “Deep Pocket” rationale.
The case for asset protection is based on the premise that individuals and businesses should be able to determine the amount of financial risk they are willing to take with regard to a particular venture or business enterprise. Certain types of entities such as corporations or limited liability companies may effectively limit liability to the amount contributed to the venture. For example, in the purchase of a piece of investment real estate, an investor may wish to limit his or her potential financial exposure to the amount contributed to the purchasing entity (perhaps and LLC). However, would the same investment be made if the amount at risk, the total obligation created by the purchase, exceeded the capital contributed? What if the amount at risk actually constituted all or more than all of the investor’s net worth?
Why would this happen? Perhaps there is a “piercing of the LLC veil” to find personal liability for the debts of the LLC or for an obligation of the company resulting from a contract dispute or a personal injury claim. Lawsuits attempting to pierce the corporate veil and lately the LLC veil are now routine litigation tactics to attempt a recovery from a Deep Pocket Defendant or as a strategy to significantly increase leverage in settlement negotiations.
In many states (California for example) personal liability cannot be contained within an entity for licensed professionals such as physicians and lawyers. Regardless of how a licensed professional arranges his or her practice, there is always personal liability for malpractice claims. As a result, the risk of loss from the business practice extends to all personal and business assets which have been accumulated rather than only those which remain invested in the practice. A personal residence, accumulated savings, life insurance and other investments are continually exposed to potential claims. Effectively, financial liability increases each year as savings or other assets are developed.
These hazards of potential litigation and the associated financial risk are true in almost every business, to a greater or lesser extent. The central question of asset protection strategies is to identify the source of the liability risk and to take appropriate steps to structure business and personal affairs to reduce or eliminate, if possible, the degree of lawsuit liability and potential financial risk.