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Is Liability Protection in Business Necessary?

by Roger on July 26, 2011

in Office Strategies

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Everyone has to admit that we live in a sue-happy society. It seems anytime some type of incident happens in someone’s place of business, on someone’s rental property or maybe a product someone purchased online did not function as advertised causing the buyer undue stress or to injure themselves, a lawsuit is hatched.

We’ve all heard the story about the woman that sued McDonalds over a hot cup of coffee she spilled while holding it between her legs while driving. You get some unscrupulous lawyer who works on a contingency and you have a lawsuit. It happens, even though most of the time no fault lies with you.

Win or lose you still end up with mountains of legal fees and possibly lose your business and worse yet, your personal assets.

Isn’t Liability Protection Just Needed for Big Business?

Let’s take your typical real estate investor. Take an individual or couple who decide to purchase a commercial or residential property. They buy the property and hold title personally managing the property themselves and controlling all decisions necessary for maintaining and improving a property. The majority of these owners maintain a property so that it is an attractive and safe property making any necessary repairs quickly and as necessary.

In other words, they are responsible landlords. Sure you hear about slumlords and others who do little to maintain a property they have with tenants, but most of your investors are mature, responsible individuals. They purchase a property and make sure they make any upgrades and repairs necessary to make it a safe and enjoyable place for someone to rent.

They use a careful selection process when interviewing possible tenants and for the most part end up with responsible tenants whom they maintain a good relationship with. But, if someone slips in the driveway or burns themselves with hot water they feel is set to high you potentially have a lawsuit. Not the landlords fault? Of course not, but a sharp lawyer will surely name the landlord in the lawsuit.

If the insurance or property itself cannot provide amounts to satisfy a judgment they can and will go after your personal residence. Sound ridiculous? Of course it is… but it happens. With this scenario the outcome would be much different had the property been owned by a corporation or limited liability company.

OK, So What Can I Do?

Actions such as these make it necessary for a small business owner or investor to protect their personal assets by forming a limited liability company or a corporation. Formed correctly and utilized correctly a limited liability company or corporation provides protection of one’s personal assets.

There are a number of different ways the example investor above can hold title to a property and avoid nightmare scenarios like the above. Simply put, you need to create an entity that is separate from the investors, one that is capable of owning real estate and that has its own legal identity. Same goes with any small business.

The simplest way is to form a corporation or limited liability company that will hold title to the investment property. There are many different ways to do this but the end result is the same. Protection of your personal assets! If they sue the corporation or limited liability company and win, the liability ends there.

About the Author

Roger

Roger Forte holds an MBA in accounting and has been working with small businesses (and their tax matters) for over 35 years. Mr. Forte is a consultant with Speedy Incorporation and LLC, advising on incorporation and LLC formations. He also serves as the lead blogger on all things relating to accounting for small business on the Speedy Small Business Blog.

 

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