You’ve worked hard to build your business, don’t lose it to a lawsuit. Likewise, you’re beginning to accumulate substantial wealth, and you should worry about protecting it from potential creditors. If you work in fields where lawsuits are common, getting sued may be inevitable. One out of every 13 doctors gets sued every year, and it’s estimated that 99% of physicians in high-risk specialties will face a malpractice claim before they turn 65. Various tools exist to keep your property safe from accident victims, health-care providers, credit card issuers, tax collectors, and other creditors.
To protect your property from claims, you should assess the arsenal of asset protection tools available – remember, each solution has upsides and downsides, and no asset protection tool is guaranteed to work against every possibility. Also, keep in mind that you can’t close the barn door after the horse has bolted – if there is an existing claim, it may be too late!
It's the first line of defense, and should be at the top of your list. If for no other reason, because the insurance company will typically pay for your legal defense – even if you win, the cost could come out at hundreds of thousands of dollars. Just about everyone has home and auto insurance, but consider the advantage of an umbrella policy, for claims that exceed the limits of your regular coverage. If you own a business, make sure you have a commercial general liability policy, and consider whether or not you need employment practices liability insurance. For certain professionals, malpractice insurance or errors & omissions insurance is available to protect against specific issues related to your trade. Ordinarily, the cost of insurance is insignificant compared to the potential savings, with the downside being the policy limit and possible exclusions.
Depending on your occupations, one of you may have a much greater risk of liability than the other, so it may be a good idea to divide assets between you so that you keep only the income and assets directly related to the high-risk job with the high-risk spouse, and have the low-risk spouse own the rest – generally, your creditors can only reach assets that are in your name. There are some possible downsides, such as in the event of a divorce, or if it involves a second marriage, so please talk to an attorney to evaluate the risks before doing this.
Or set up several! When you operate under your own name, there’s no difference between you and your business, nor is there a separation between your assets and that of your business. A single lawsuit can ruin you. Or, if you’re in a traditional partnership, your partner’s problems can cost you more than your friendship. A separate legal entity, such as a corporation or a trust, can serve to separate you from your business. And multiple entities can protect one line of business from another. This way, only the assets belonging to the entity getting sued are at risk.
There are many business entities to choose from, such as a traditional corporation, trusts of various kinds, and a seemingly limitless number of ways to combine the letters C, L, and P. (LLC, LP, LLP, LLLP, PLLC). Let us help you figure out which one(s) is right for you .