September 20, 2020

Volume X, Number 264

September 18, 2020

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What Can Business Owners Do to Shield Their Assets from Civil and Criminal Judgments?

As a business owner, facing a personal judgment could mean losing a substantial portion of your assets—including your ownership interest in your business. Liability risks exist with respect to virtually all aspects of business ownership, and business owners can face substantial civil and criminal liability risks in their personal lives as well. Even if your business operates as a carefully structured corporation or limited liability company (LLC), this is not sufficient on its own to provide full protection against personal liability. In order to avoid losing your business and your personal wealth, you need to put a comprehensive asset protection strategy in place.

What is Asset Protection?

Asset protection involves using legal tools and structures to insulate your personal and business assets from third-party claims. This includes claims against your business and claims against you personally. If your company gets sued, you are also very likely to get sued as the company’s owner, and claims unrelated to your business can lead to substantial liability exposure as well.

Businesses and their owners can face liability in civil and criminal proceedings. An effective asset protection strategy will provide protection against both types of judgments. Even if your business is relatively low-risk, and even if you have no intention of engaging in criminal conduct, unexpected claims and allegations can arise, and poor decisions by co-owners and employees can lead to both lawsuits and law enforcement proceedings.

“Business owners can face liability risks in all aspects of their professional and personal lives. If a plaintiff knows that the likelihood of collecting on a substantial judgment is high, that plaintiff is far more likely to proceed with litigating through trial.”

What Strategies Can Business Owners Use to Protect Their Assets?

When it comes to protecting their assets, there are two major focuses for business owners. These are: (i) reducing the risk of civil liability and criminal investigations, and (ii) protecting their (and their company’s) assets from civil and criminal judgments. While the best way to avoid liability for a judgment is to avoid facing a judgment at all, this is not something that is entirely within business owners’ control. As a result, business owners must take additional measures to protect their assets in the event of a judgment as well.

Reducing the Risk of Civil Liability and Criminal Investigations

First, we will talk about reducing the risk of facing a civil lawsuit or being targeted in a federal criminal investigation. While these are not asset protection strategies per se, they are critical precursors which, if implemented effectively, can greatly reduce the risk of a business (or its owners) being targeted in a civil or criminal proceeding.

1. Make Sure Your Business Entity is Legally Sound

If structured appropriately, a corporation, limited liability company (LLC), or other limited liability entity will protect its owners from personal liability in the event of a judgment against the business. Establishing multiple entities in order to segregate assets and operations can help to mitigate potential exposure in the event that one of the companies gets sued. When forming a business entity, it is imperative to hire legal counsel to draft custom-tailored organizational and governing documents, as deficiencies here can potentially lead to personal liability as a result of “piercing the corporate veil.”

2. Make Sure Your Company is Legally Compliant

Effective and comprehensive corporate compliance is essential to mitigating the risk of civil and criminal liability for companies in a broad range of industries. Companies can face lawsuits and law enforcement proceedings under a broad range of state and federal statutes, and many federal statutes impose substantial penalties for non-compliance. Implementing a detailed and custom-tailored corporate compliance program can provide significant protection against liability, while failing to address corporate compliance can create substantial liability exposure.

3. Train Your Employees with a Focus on Risk Mitigation

With corporate compliance policies and procedures in place, the next step is to provide adequate training to relevant employees. Employees who can potentially put the company (and its owners) at risk should be clearly advised of the risks their roles entail, and they should be provided with clear guidance with regard to how they can avoid compliance issues. All new hires should receive training, and existing employees should be required to certify to the completion of ongoing and updated training programs as well.

Protecting Your (and Your Company’s) Assets from Civil and Criminal Judgments

Now, let’s talk about asset protection strategies specifically. In the event that your company gets sued; you get sued personally; or you become the target of a federal investigation for bank fraud, insurance fraud, government contract fraud, or any other criminal offense, the following strategies can be used to protect your assets even in the event of an unfavorable judgment:

1. Buy Appropriate (and Adequate) Insurance Coverage for Your Business

Insurance coverage won’t protect you against criminal liability, but it can provide an important first line of protection if you or your company gets sued. All companies should have commercial general liability (CGL) or umbrella coverage, and many companies will need additional insurance policies that are specific to the products or services they offer. Of course, all businesses and business owners should have auto insurance and property insurance, and business owners can further insulate themselves by purchasing personal umbrella coverage to protect against unforeseen liabilities.

2. Implement an Effective Business Asset Protection Strategy

Businesses of all sizes can implement asset protection strategies that will prevent judgment creditors from being able to collect on their judgments. One of these strategies, which we briefly mentioned above, is segregating assets and operations in separate business entities. When structured appropriately, each affiliated entity will stand alone for purposes of potential liability, so a judgment against one entity will not be able to be enforced against another.

There are various other asset protection strategies that businesses can utilize as well. For example, in many cases it will make sense for businesses to move assets overseas to jurisdictions with favorable asset protection laws. Forming foreign entities can serve an asset protection function as well. While there are some costs and operational efficiencies to consider, it will often be more than worthwhile to set up an offshore structure that protects the company’s assets from seizure in the U.S.

Importantly, when setting up offshore accounts and business entities, companies must also give due consideration to the federal tax implications involved. While these types of activities will generally be either tax-neutral or tax-advantageous, holding assets offshore creates certain additional reporting requirements to the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN).

3. Implement an Effective Personal Asset Protection Strategy

Finally, there are several asset protection tools that are available to U.S. business owners who need to ensure that their accumulated wealth will not be lost to a civil or criminal judgment. These tools exist both in the U.S. and abroad.

When developing an asset protection strategy, the key is customization. While there are many tools available, many of these tools only work in certain specific circumstances, and each comes with its own benefits and limitations. Some examples of the tools that business owners can use to protect their wealth include:

  • Domestic asset protection trusts (DAPT)

  • Domestic and foreign LLCs

  • Equity stripping strategies

  • Foreign asset protection trusts (FAPT)

  • Foreign investing and bank accounts

  • Gifts, transfers, and exchanges

  • Irrevocable spendthrift trusts

  • Personal residents trusts

  • Prenuptial and postnuptial agreements

  • Qualified and nonqualified retirement plans

This list is not exhaustive, and not all of these tools are good options under all circumstances. In order to achieve maximum protection, business owners will need to work with their legal counsel to build a customized asset protection strategy.

The Security Provided by a Comprehensive Asset Protection Strategy is Well Worth the Investment

While implementing an effective asset protection strategy provides direct tangible benefits in terms of shielding assets from potential judgment creditors, it also provides essential peace of mind. Once you know that your assets are secure, you can focus your concerns elsewhere. An attorney who is experienced in representing businesses and advising individuals regarding asset protection can provide the security and confidence you need to continue taking measured risks in order to grow your company and continue building wealth that you can both utilize during your lifetime and pass down to future generations.

When is the right time to start thinking about asset protection? As with most important decisions, there is no single right answer. But, if you have assets that are worth protecting, or if you want to get out in front of any potential liabilities to make sure your future-acquired assets are secure, it makes sense to go ahead and speak with an attorney about the options that you have available. While it is never too early to think about asset protection, there will come a time when it is too late.

Oberheiden P.C. © 2020 National Law Review, Volume X, Number 216

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About this Author

Dr. Nick Oberheiden Federal Defense Lawyer Oberheiden PC

Dr. Nick Oberheiden focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation. He has defended clients in PPP Loan Fraud cases and COVID-19 investigations. Nick also directs internal corporate investigations and he leads defense teams in whistleblower actions, corporate defense cases, as well as cases involving national security and elected officials.

Clients from more than 45 U.S. states have hired Nick to seek effective protection against government...

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