ASSET PROTECTION PLANNING
Imagine the following scenarios:
You remodel homes for a living. You install a bathtub in the upstairs bathroom of a home. You forget to seal the tub properly and it slowly leaks over the course of the next year. When the homeowner discovers the leak it has already caused dry rot in the ceiling and the walls. Among the other defendants they name you personally.
Your employee is driving a company truck and dozes off at the wheel. He wakes up only after he has plowed through the storefront of a local produce shop. The storeowners bring suit and name you personally as a defendant.
You are home watching TV one night minding your own business. A door-to-door salesman walks up your front walk way and trips on the hedge and breaks his ankle. He sues you.
You get the idea. We live in an increasingly litigious society. As an a
ttorney I have seen numerous cases with facts very similar to the ones outlined above. Whereas many lawsuits have merit, some do not. Even if you are slapped with a lawsuit that has no merit you may not be able to afford to defend against it or get a runaway jury that awards the plaintiffs a large judgment.
Right now, before a claim arises, is the time to start thinking about how you can protect your hard earned assets. I encourage you to review RCW 19.40 which is the Washington Uniform Fraudulent Transfer Act. This act defines fraudulent transfers as any transfer made to hinder, delay or defraud creditors includes transfers that are for less than the real value or made while you are insolvent. It is important to remember that whereas you can take certain measures that have valid business reasons and that are exchanges for reasonably equivalent value, you cannot make any transfers with the purpose of hindering, delaying or defrauding creditors when you know a claim or potential claim exists.
Although every fact scenario is different here are some general ideas that may help protect your assets. This is not legal advice and is not intended as such.
CORPORATE STRUCTURES
If you own a business or own land it is crucial that you set up a business entity that limits your personal liability. I cringe when I hear the words “sole proprietorship.” If you are a sole proprietorship running a beauty salon and one of your employees nicks a client’s ear with a pair of scissors and they sue the salon, your personal assets (including your savings and even equity in your home) is at stake.
However, if you pay the $180.00 filing fee to the Washington Secretary of State and complete the Articles of Formation and operate as an LLC or a Corporation, your personal liability is limited. The plaintiff in the above case can only come after the assets of the company and not you personally. It is important that you follow the corporate formalities. The company cannot simply be an “alter-ego” of yourself. How do you do this? Keep corporate books. File your annual reports, keep meeting minutes and draft bylaws. Start a company bank account and adequately capitalize the company. This is not a comprehensive list but make sure you separate yourself adequately from the company.
The same concept applies if you own real estate. If neighborhood kids hop your fence and break their leg on your property you could be personally liable. If the land is owned by an LLC only the LLC is liable. The solution is simple: form a business entity, draft a quit claim deed and real estate tax affidavit and transfer title of the land to the business entity. This is a tax free transaction, it’ll take about an hour to do, and the recording fees are less than $75.00. It’ll save you headaches in the long run.
BULLET POINT: If you operate a business start a LLC or Corporation. If you own land transfer it to a LLC or Corporation.
EQUIPMENT AND EMPLOYEES
The same concepts for businesses and land can be applied to equipment and employees. If your equipment malfunctions and harms someone or your employee does something stupid and you get sued your entire business assets will be at stake. (Since you formed a LLC or Corp. your personal assets are adequately protected).
However, let’s say that a separate LLC owns your equipment. So we have Business, LLC which owns and operates your business and Equipment, LLC which owns your equipment. You then draft a lease wherein Business, LLC leases the equipment from Equipment, LLC. In this case, if someone sues because of a problem with the equipment, they can likely only name Equipment, LLC as a defendant. Therefore the assets of Business, LLC (cash, accounts receivable, etc.) are protected from this type of lawsuit.
Likewise, if you form an employee leasing company and lease the employees from Employee Leasing Co. to Business, LLC you have another layer of protection from lawsuits brought due to actions of your employees.
BULLET POINT: Form an LLC for your equipment and lease it to your business. If it makes sense for your business model, do the same thing with your employees.
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