Business Planning for Asset Protection

There are millions of small businesses in the United States, and millions of these small businesses are either sole proprietorships or general partnerships.  Either way, these businesses (many of them professionals, such as physicians, dentists, surgeons, attorneys and accountants) leave themselves and their owners vulnerable to the random or frivolous lawsuit that could wipe out most or all of their value and accumulated assets.  

Example:  Sometimes the liability that endangers a professional’s estate can arise from events several steps removed from anything the professional actually did.  For example, Attorney Jones runs his practice as a sole proprietorship for 15 years.  His secretary is asked to run an errand for the office.  Using her car, she hits a pedestrian and causes serious injuries.  While she was insured, neither her assets nor her automobile insurance policy covered the $5 million judgment in favor of the pedestrian.  However, since she was working for Attorney Jones at the time, the plaintiff’s attorney was able to bring him in as a defendant. After his liability insurance is exhausted, he is still liable for $2.5 million.  As a result, Attorney Jones  has lost his life savings and his home.

Another example:  Two doctors carry on their medical practice as partners.  Dr. Dimento prescribes valium for a patient suffering from neck pain.  The patient ignored the doctor’s instructions and the warning label about driving while taking the medication and caused a serious auto accident.  The patient had little insurance and few assets, so the doctor was sued.  The plaintiff’s attorney successfully argued that the doctor should have known that the patient might drive his car while on the medication.  The jury found the doctor liable for $5 million in compensatory damages.  The practice’s malpractice insurance refused to defend the doctors or pay any of the judgment, since the policy only covered claims by a patient - not those injured by a patient.  The practice was forced to close and the assets of both doctors were seized to satisfy the judgment.

In each of these examples, the doctors and the lawyer were not directly involved in the event that brought them into jeopardy.  Yet, they each lost all they had accumulated.  The shame of it is that in each case the professionals could have preserved their respective estates by relatively simple preventive action.

Basic Asset Protection: For the professional and small business owner, the first step towards asset protection is to convert the nature of the business entity in which the business or professional practice is carried on.  In general terms, carrying on a business as a sole proprietorship or general partnership is practically asking to lose your assets.        

What simple steps can be take to protect your wealth?

   •        Incorporate the sole-proprietor practice or convert to a limited liability company: This basic step will insulate your ownership of the business from your ownership of you other personal assets.  If the business loses a lawsuit, the only assets the plaintiff could reach would be the assets of the business.

   •        Convert a general partnership to either a corporation or a limited liability partnership.  Converting to a corporation will insulate your personal assets as described above.  Conversion to a limited  liability partnership will likewise shield your assets from the risks of your business or practice. An important consideration:  In a general partnership professional practice, each partner would be responsible for the negligence or malpractice of his other partners.  In a limited liability partnership, each member is not liable for the malpractice of his partner as long as that member has not participated in the action that caused the negligence claim.

In subsequent articles, we will examine the process of converting from sole proprietorship to corporation or limited liability company and from general partnership to corporation or partnership.  The decision as to which entity to select takes into account interpersonal, tax, estate planning and asset protection considerations.  It also highlights the value of the interactive approach of combining estate planning and asset protection into a synergistic activity.                              

626 RexCorp Plaza
Uniondale, NY  11556

Telephone
(516) 522-2575

                                  Index of Asset Protection Planning Topics

|   Business Planning for Asset Protection   |       |  The Use of Family Limited Partnerships  |

|   Asset Protection Trusts     |                        

                                           Index of Estate Planning Practice Areas

| Wills,Trusts and Beyond  |                                                        | Estate Planning Under the 2001 Tax Act |  

| Estate Planning for the Non-Traditional Family |                 |  Business  Succession Planning    |

Copyright © 2007 STEPHEN C. SILVERBERG, PLLC  All rights reserved.
Last modified: December 27, 2007

Lawyer Advertising.  This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship. See full Disclaimer.