Shielding Your Personal Assets From Lawsuits

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From the Redondo Beach Chamber of Commerce January 2007 Newsletter

Labor Law Corner
by Matthew J. Trostler, Esq., Borton Petrini, LLP

Forming and operating a business in California can be a rewarding experience. However, lawsuits filed against businesses seem to be an occupational hazzard these days. One’s personal assets may be at risk, and the structure of one’s business may not give adequate protection. Although a sole proprietorship and a partnership may be easier than a corporation to form, the risk of personal owner liability of a corporation is much lower. Protecting oneself from the risk of lawsuits is significant for those doing business in a litigious society.

In a sole proprietorship, the business and the owner are one and the same. Because there is no separate legal entity, the sole proprietor may therefore have unlimited personal responsibility for business liabilities.

A partnership is somewhat different as there are two types of partnerships, general partnerships and limited partnerships. Typically, general partners are "jointly and severally" liable for the liabilities and obligations of the partnership. That is, one partner could potentially be responsible for all of the partnerships’ liabilities. To the contrary, limited partners generally do not have personal liability for the business losses of the partnership. Limited partners are simply at risk only to the extent as the partnership agreement stipulates.

Corporations are considered a separate legal entity and therefore owners of the corporation (stockholders) are typically not personally responsible for the losses of the business, including liabilities generated as a result of a lost lawsuit. Although most business start out as a small business, the same protections apply to both small and large corporations. Even though there are some exceptions to this general rule, individual owners are not personally liable for the losses of the business provided the corporation is properly established and operated. Only the investment in the corporation itself is at risk.

A second level of protection can be obtained through insurance notwithstanding the form of the business. Insuring the business through a comprehensive general liability policy is another level of protection for one’s business. There are many varieties of insurance available to businesses. For example, there are insurance policies available which offer protection for liability, employment issues, workers’ compensation and directors & officers. One should consult with a licensed insurance broker to determine the applicable coverages available to one’s business.

Appreciating the risks of conducting business in California is an important step in protecting one’s assets. One should consult an attorney who can assist the business person in assessing the risks associated with doing business. Minimizing personal exposure and maximizing profits should be the goal of any business person.