Business Agreements and Asset Protection Planning

Just registering a business with the State and doing business in that name will not protect you from liability. An LLC, S-Corporation or other entity needs to be properly created and maintained. You need to understand and respect corporate formalities and be adequately capitalized (usually through proper insurance) to cover foreseeable risks. A good creditor’s lawyer can “pierce the corporate veil” and attach your personal assets if your corporate entity is not properly created and managed. Proper contracts with your customers and collaborators are also critical in minimizing the risk of business-related liability.

Many small and closely-held businesses begin as a handshake between two or three partners, who sometimes go as far as registering a limited liability company or other corporate entity with the State – but then they turn back to running the business and fail to hammer out an operating or shareholder agreement. This works fine as long as everyone is healthy, dedicated to the business, and carrying their share of the weight. However, when death, disability, divorce or disagreement among the partners occurs, failure to plan becomes very costly. Surviving spouses become accidental partners who may – or may not – contribute to the smooth operation of the business. Divorcing spouses may be awarded partial ownership or future economic rights in the company. What if one of the partners simply wants out? How do you value the business, and his or her stake in it? How is the buyout paid for? What rights do minority owners have in a sale of the business?

Without a road map that leads to rational, predictable answers to these and other questions, you are setting yourself up for expensive litigation and ruined relationships. Don’t stop halfway in forming your business – and if you did, don’t continue to neglect this key element of your asset preservation plan… especially if most of your current and future wealth depends on the success of your business.