How entrepreneurs can best avoid frivolous lawsuits
A significant issue is that it's relatively easy to sue business owners, even without a legitimate reason. Just because a lawsuit lacks merit doesn't mean that business owners won't find themselves entangled in one. Moreover, even if entrepreneurs would ultimately win such frivolous lawsuits, they can still be highly stressful and financially draining.
Asset protection planning offers a way to mitigate the possibility of being sued unjustly and minimize the long-term impact of undeserved lawsuits. It can be thought of as pre-litigation risk management aimed at deterring and discouraging lawsuits in the first place. In cases where litigation does occur, asset protection planning can help entrepreneurs negotiate settlements that are more favorable than what they would otherwise face.
While most entrepreneurs have taken some steps to protect themselves from baseless lawsuits, the challenge lies in the lack of a cohesive and holistic approach.
Liability insurance: The first and most crucial step is typically obtaining liability coverage for both the business and the entrepreneur. This is the most cost-effective measure that business owners can take. Unfortunately, although many business owners have liability insurance, they often lack the appropriate type and amount of coverage.
Liability insurance is often overlooked by entrepreneurs. It's viewed as something they know they need, and once they have some form of coverage, they assume they are adequately protected. However, this approach can easily result in inadequate coverage. Many entrepreneurs, particularly highly successful ones, find themselves underinsured or lacking sufficient coverage.
Entrepreneurs commonly pay more attention to commercial liability coverage but neglect personal liability coverage. They fail to realize that if they become involved in a personal lawsuit, their businesses can suffer. The solution in such situations is usually a personal umbrella policy, which is generally the most cost-effective way to protect both personal and business assets.
Legal strategies and structures: Once appropriate liability coverage is in place, entrepreneurs should consider various legal strategies. Asset protection trusts can be highly effective for specific business owners as they allow certain assets to be shielded from creditors. However, it's crucial to evaluate each business owner's situation carefully, as different jurisdictions have varying rules governing these trusts.
Another way to safeguard business assets from baseless lawsuits is by placing them in separate corporate entities. For instance, if a business owner has multiple companies, it's advisable to establish distinct corporate structures for each. This way, a lawsuit targeting one company will not impact the others.
The best legal strategy always depends on the individual circumstances of the entrepreneur. Nonetheless, there are numerous ways to leverage legal strategies and structures to prevent the unjust seizure of wealth by individuals who misuse the legal system.
Collaborate with top professionals: Well-thought-out and implemented asset protection plans are typically not contested, as potential plaintiffs understand the formidable challenge they would face in litigation. To create such plans, many entrepreneurs rely on the expertise of leading professionals.
However, it's essential to acknowledge that not all self-proclaimed asset protection specialists possess the necessary competence. Some professionals may aim to deliver satisfactory results but lack the expertise required. Understanding a few legal strategies and structures may not lead to the most effective asset protection plan.
Unfortunately, a small percentage of so-called asset protection planners may be opportunists preying on business owners' concerns. They may push questionable legal strategies that could lead entrepreneurs to pay dearly for structures that would not hold up in court.
What remains crucial is for business owners to have a clear understanding of the big picture regarding the actions they are taking. Furthermore, they must feel comfortable with these steps and the likely outcomes in the event of a lawsuit.
