Will You Be a Lawsuit Target This Year


by Michael Potter, J.D. - Date: 2007-01-05 - Word Count: 945 Share This!

The USA is home to over 75% of world's lawyers and 90% of the world's lawsuits. We've all seen those disgusting television ads urging audience members to file claims and lawsuits. One out of every five people in the U.S. will be involved in a lawsuit, and if you're a business or property owner your chances go up considerably to one out of three.

Why So Many Lawsuits?

Some say it's because we don't spay and neuter trial lawyers and that's why they're 'overpopulated'. Others blame it on the American cultural penchant for blame and finger-pointing over life's unfair outcomes. Whatever the reason, it just makes sense to reduce the risk of being served with a lawsuit and to increase the protection to survive one with your financial life still intact.

Reducing the Risk of Litigation

Most lawsuits involve 'tort' claims, i.e. breach of contract, intentional harm or negligence, etc. If you own rental property, own a business, have teenage drivers, coach a team, or have accumulated assets, you're a likely target. These are 'lawsuit magnets'. Consider ways to reduce the likelihood of being in a lawsuit by reducing your lawsuit profile.

For example, rental property owners should keep their properties well-maintained and safe from risks. Business owners should pay attention to customer service and financial disputes, adding arbitration or mediation clauses in contracts to resolve disputes before they ever become lawsuits. Most of all consider 'Entity Layering' with LLCs and Family Limited Partnerships. Ask your insurance carrier, family and employees to help with an internal audit of your business and risk management practices to uncover hidden risks and help you design practical mitigation. The saying is true - 'An ounce of prevention is worth a pound of cure'.

Increase Your Liability Protection

Being proactive to reduce your risk of lawsuits is just a first step. The next is to remember that sometimes no matter what you do, you can still be a lawsuit target. Most of us believe we are not likely to be sued because we're nice people, we try to raise our kids right, we're faithful to our religious beliefs, or because we try to avoid risky behavior that might harm others.

So what can the average person do to increase their level of protection?

· Start with adequate liability insurance. Ask your agent about the types of claims you're most at risk for, what your policy actually covers and just as importantly, what it does not cover. Look at the size of jury awards being rendered for those risks.

· Next, see if an 'umbrella policy' can be added to your homeowner's coverage. An umbrella policy is an inexpensive supplement that just might come in very handy if (when) you're sued. Some offer coverage of a million dollars for about $250 to $350 a year.· If you are a 'sole proprietor' or 'joint venture' business owner, you are walking around with a target on your back that says 'Kick Me'. Not only are sole proprietors the most tax-audited business owners, but they are also most at risk. Because the sole proprietor and the business are considered 'one-and-the-same' under the law, you are personally liable and can lose everything. Consider forming a Corporation or a Limited LiabilityCompan ('yLLC').

· If your business is already in a corporation or a limited liability company, get help to ensure you meet the standards of 'compliance' so your company provides the first layer of protection from unknown future lawsuit predators.

· Many trial attorneys try to 'pierce the corporate veil' by claiming companies aren't observing corporate formalities or by applying the 'alter ego' doctrine, asserting that you've conducted yourself such that the court should ignore the existence of the company entity and hold you 'personally liable'. To avoid this, don't commingle personal and business expenditures. Observe corporate formalities of board meetings and minutes. Take reasonable compensation and pay personal expenses with personal, not business funds.

· Start developing a step-by-step plan to acquire business credit in the name of your company itself, distinct from your own personal credit, since this will help your business grow stronger and at the same time reinforce the defense that you and your business are not one-and-the-same. With guidance, you can establish credibility and stand-alone financial power in the name of your company that will not only create lines of credit for your business to expand, but reduce the strain on your personal credit.

· If you own rental properties, consider the new 'Series LLC'. Think of it as a single-entity 'mother ship' that allows you to separate assets, liabilities and accounting of several properties but consolidate them for tax returns. Another alternative might be a Limited Partnership as a liability shield. Bottom line - you have planning options.

· About seven states have adopted the 'Limited Liability Limited Partnership' (or 'Triple LP'). In ten years it will likely be nationwide. The Triple LP gives the (managing) general partner the same level of protection that the limited partners enjoy and Nevada has one of the best Triple LP laws in the nation.

· Your company should adopt a 'qualified' retirement plan such as a pension or defined benefit plan. Even a one-person company can adopt a Self-Directed 'Solo 401(k)'. Current law protects funds inside of qualified retirement plans from being subject to creditor claims.

In the end, protecting yourself from a lawsuit is not solved by waving a magic wand or by just hoping you'll avoid becoming a target. Take it upon yourself to seek out help in establishing a corporation, limited liability company, limited partnership and a qualified retirement plan. Every step you take now in reducing risk and increasing your protection is a step closer to enjoying a safe, comfortable retirement having safeguarded your accumulated wealth.


Related Tags: business, partnership, corporation, lawsuit, asset protection, llc, privacy

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