by Nick Gromicko and Kate Tarasenko, InterNACHI
An asset is anything of value in your name, such as a house, a vehicle, your business, and even your bank account. Unfortunately, if you are successfully sued by someone who is unhappy with the results of home inspection that you performed — regardless of whether the lawsuit has merit — attempts will likely be made to tap some of your assets as compensation if you wind up on the losing side. In order to protect your home and personal property from being exposed to such liability, along with your business assets beyond your E&O insurance, it’s important to safeguard all your assets through a collection of techniques known as asset protection. Taking some of these urgent precautions will ensure that, in the event that you lose a lawsuit brought against you and your inspection business, your home, personal vehicle and other personal property will be exempt from garnishment, repossession or seizure. It will also provide you with the opportunity to rebuild your business.
Approximately 50,000 lawsuits are filed daily in the United States, which equals one lawsuit for every 17 Americans, annually. In professions that are predisposed to litigation, such as home inspection, medicine, law and business, the chances of being sued are considerably higher, although unscrupulous opportunists may target anyone who they perceive as having deep pockets. And there are plenty of ways besides litigation that unprotected assets can be taken away, such as through identity theft, divorce, death, healthcare costs, probate, auto accidents, home fires, floods and bankruptcy, to name a few. Any of these events can ruin someone’s finances if they lack proper asset protection.
The first things every new small business owner should consider include the following:
- Incorporate. Incorporating a business limits the owner’s personal liability in lawsuits filed against the business because a corporation or LLC is considered under the law to be a separate legal entity from its owners. However, the “corporate veil” can be pierced in certain circumstances, such as when it can be proven that the business owners did not obey corporate formalities.
- Use a family limited partnership (FLP). Family limited partnerships are specially designed partnerships that consist of general and limited partners. The FLP allows an individual to maintain full control and enjoyment of their property while separating themselves from actual legal ownership. A creditor of a single partner cannot reach the assets owned by the partnership because the partnership, as an entity, owns the asset. This does not prevent the partnership from being sued, but it will keep certain assets separate and unexposed to legal liability or claim.
- Purchase professional liability insurance (E&O). The costs of insurance premiums are generally small compared to defending a lawsuit.
- Keep major assets encumbered. If you own property free and clear, you can imagine how attractive that is to a judgment creditor. Many home inspectors lease their company vehicles to prevent them from becoming a target.
- Check your state’s homestead exemption. Homestead property protection laws help protect your home from creditors (as well as help provide survivors with a home after the death of the primary wage earner).
To be effective, asset protection should be performed years before you find yourself in financial trouble. Any transfer of ownership of property after the emergence of a significant claim may be deemed fraudulent, which can result not only in seizure of the asset anyway, but significant civil penalties. After a claim arises, you need debtor and possibly pre-bankruptcy planning, as asset protection becomes more difficult as legal proceedings progress. Most importantly, have an attorney and an accountant guide you through the process of asset protection. You need these experts to make sure that asset protection planning is performed competently and, even more importantly, within the parameters of the law. Professionals will make sure that you use appropriate legal structures to safeguard your assets without deliberately defrauding creditors.