In this part III of the “how can I protect my small business from lawsuits” articles, I focus on layering. What do I mean by layering?
You can have, for example, a Limited Liability Company (LLC) and you, the human, be the owner of 100% of it. That type of ownership structure will give you the least protection possible. The law treats this type of entities almost as a sole proprietorship rather than a “partnership”—one of the very purposes of an LLC. This structure makes it easier to reach the owner if something happens, as the entity and you are virtually the same.
To avoid this, it is important that you have several layers of ownership protection. The first one is to always have a partner. Even if that partner owns 1% of the LLC or entity. Having a 1% co-owner will create a legal partnership that will give the LLC device more strength, and consequently it will better shield its owners’ assets.
Now, the owners/partners don’t have to be humans necessarily, they can be another LLC. For example, you could have LLC-1 that is owned 99% by LLC-2 and 1% by LLC-3. LLC-2 at the same time, can have its own owners, LLC-4 at 99% and LLC-5 at 1%. LLC-4 could be owned by an irrevocable trust in a foreign country for the benefit of Human-Owner’s children.
As seen, this sophisticated system of layers adds additional protections to the company and shields its assets from exposure. Should, god forbid, LLC-1 get in trouble, it will be very hard to reach the personal assets of Human-Owner because they are so far removed, deep into the layers of protection.
Of course, like everything, there are pros and cons. Creating and maintaining layering systems is not cheap. The more layers and entities involved, the more legal and accounting fees involved—if they are to be properly maintained. A business owner must make a cost benefit analysis and determine if the amount of assets and the type of business activity involved (and how risky it is) merits investing in a sophisticated system of layers.
For more information about how to protect your business from lawsuits email me at firstname.lastname@example.org, or call 305-570-2208.