Protecting Your Assets: Practical Ways to Limit Liability
By: Christiaan D. Horton
Many people know that doing business as a corporation or a limited liability company has benefits for asset and liability protection. In today’s world, it is easy to access the Missouri Secretary of State’s website and input the information necessary to generate a Certificate of Organization for a limited liability company. The cost is minimal, but many operate under the false pretense that this initial step is “mission accomplished” – that they now have a solid personal liability shield providing protection of personal assets from future business creditors.
For a limited liability company to provide the protection intended, all organizational steps for entity creation must be accomplished including the preparation and execution of an Operating Agreement. Online forms or templates are available, but filling in a few blanks in a form is a dangerous practice. It is very likely that Operating Agreements created in this fashion will cause more problems than they might solve – problems that could be very costly to remedy.
A good Operating Agreement should cover many subjects including the procedures for accounting and tax matters, capital contributions, management, entry and exit of members/owners, events that could trigger dissolution of the company, and provisions relating to membership interest valuation, just to name a few. For those companies that have more than one member, and certainly, for those that have members at arm’s length (i.e., outside the “family business”), a detailed Operating Agreement is well worth the investment should issues arise in the future with company governance.
Regardless of entity choice, all requisite formalities in the formation and administration of the business must be followed for the liability shield to withstand a creditor’s attack. Comingling personal and company funds, using company assets for personal reasons, and charging personal expenses on company credit cards, are all examples that will lead to shield penetration should a future claim arise that exposes the company beyond its insurance coverage and/or limits.
Although insurance is usually the best first line defense for any business, insurance has its limitations as well. Some claims will not be covered under your policies or may exceed the limits that you have in place. When that happens, the next targets are company assets which include bank accounts and all those assets typically found on the company’s balance sheet. Once the assets are foreclosed, and still, more is needed, you can be assured that a probe into corporate formalities and efforts to pierce the corporate veil will be next. The value of contract provisions that limit liability, provide protections on rights to payment, secure indemnifications for the negligence of others, and provide for recovery of attorney’s fees and costs of litigation, are all solid measures to have in place in key business transaction documents. Indemnity provisions can force others to step up with their insurance and their assets first in the event of a claim that may land at the business’s doorstep like unwelcomed front-page news.
Diversification of assets is also a solid strategy to limit the amount of exposure for each separate entity. By way of example, it is very common for those having investment or rental property to have separate limited liability companies holding title to those properties so liability exposure is limited to one or a small group of properties instead of the entire bundle which, in the real estate world, can add up quickly. Yes, it is a bit more involved to separately administer accounts, books, and records for multiple entities, keeping all funds and administrative details segregated, but the first major claim beyond insurance will make this decision look very wise in the end.
Trying to navigate the internet searching for forms, looking for templates, and managing the drafting of key contract provisions is a risky battle plan. Attorneys are trained and have experience crafting protective language and suggesting strategies to withstand the enemy’s advance. Resist the temptation to “Google” your way through your business formation and document drafting and have the peace of mind that a trusted legal professional is providing the guidance that you need. The attorneys at Carnahan Evans are ready to lead you through the minefield so you can fend off enemy attacks and accomplish your mission.
© Christiaan Horton 2022
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Christiaan D. Horton is a shareholder in the Litigation/Dispute Resolution Practice Group and the Transactional Practice Group of Carnahan Evans PC. He can be reached at chorton@carnahanevans.com.
