As part of a comprehensive asset protection plan, it is important that the small business owner avoid day-to-day liability risks. A vital piece of any plan prepares for the likelihood that a small business owner someday will end up in court.
Most Americans understand that we live in a litigious society. For example, new physicians usually are taught that they should expect to be sued for malpractice. The results of being sued can be both financially and psychologically devastating.
In many cases, even a defendant who wins a lawsuit still loses financially, because the cost of defending against the suit generally will not be reimbursed, even when the defendant prevails. Even preparing for the possibility of being sued can be financially devastating.
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Physicians in many specialty areas pay over $50,000 per year for malpractice insurance. Insurance companies justify such extreme premiums by underscoring the significant likelihood that the insured party will be sued, and that the plaintiff will be awarded substantial monetary damages.
Extreme malpractice premiums have caused some physicians to forego malpractice insurance, and many states, in turn, mandate that they carry such insurance.
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Litigation also can have significant psychological consequences. In some cases, those who render professional services may begin to question their competency. Defendants, in general, may be extremely anxious and concerned, in particular, that they may lose their reputation and their home, bank accounts, or other personal property, acquired through years of hard work.
Unfortunately, not all of these concerns are misplaced, as most defendants do not know how to control a court system that significantly heightens the risk of loss, and then they complicate matters by also not having a comprehensive asset protection plan in place.
The significant risk of being sued, of course, is not limited to physicians or even to professionals in general. The small business owner who will be performing personal services must be especially cognizant of the risks of being sued. Personal commission of a tort, such as negligence or malpractice, represents a significant exception to the limited liability that otherwise applies in a limited liability company (LLC) or a corporation. Thus, the consequence of personally committing a tort will not only be a risk of loss of the business's assets, but of the owner's personal assets, outside of the business, as well.
Moreover, a successful business will employ many other people who may commit negligence while carrying out the entity's business. Liability for negligence committed by employees generally will run to the entity, thus exposing the business's assets to a risk of loss. Further, when the business entity sells goods that could cause injury, there is a significant risk that the purchaser, members of that household and, possibly, subsequent transferees will sue the business based on what is termed "product liability."
Of course, the small business owner also will face a significant risk of litigation due to the many contracts the business entity forms. Further, if the entity and its contracts (including sales and employment contracts) are not properly structured, liability may run to the owner personally. In addition, if the owner has guaranteed the entity's contracts, liability will extend to the owner's personal assets.
For these reasons and more, it is imperative to have an understanding of the risk factors inherent in litigation, as well as the ways you can better control the risk factors of the court system to your advantage.