Asset protection planning for affluent individuals has been around since the mid-1980s. But businesses get sued, too. Yet, when you ask C suite executives what they’re doing to protect their company’s assets from lawsuits, you mostly get a blank stare and the common response of “nothing.”
Businesses are continuously plagued by class action lawsuits in which plaintiff’s lawyers look to pile on a community of individual plaintiffs to scare the company into a settlement or face years of costly litigation and a drag on company morale.
We spoke with Bob Gonda, a career finance professional having served as CFO with three large restaurant chain companies including Baja Fresh, and two privately owned significant franchisees of Denny’s, Burger King and Carl’s Jr. He is currently an independent finance consultant and board advisor.
Bob told us that he is well aware of the risks of these types of lawsuits. In fact, he said that as CFO of these corporations he was involved in class action claims. He suggests proactive due diligence can stave off these claims. “Companies need to review and update their Directors & Officers liability insurance, Errors and Omissions insurance, EPLI, and Cyber Security insurance policies to ensure they are up to date and offering the best protection possible for the company and its owners, executives and employees. But once a lawsuit is filed there is not much a company can do to shore up its assets. It is essential to be proactive where asset protection is involved.”
More Options Companies Can Consider to Protect Their Assets
- Lease equipment, versus owning it, as this reduces a company’s assets on their balance sheet.
- Some corporations create separate companies for each brand that they own to reduce exposure.
- Create separate entities for the company’s IP and then license it to the operating company so the IP is not owned by the target of a future lawsuit.
- Consider distributing retained earnings to shareholders and stakeholders so the funds are not exposed to business liability. Have the company owned by a foreign asset protection trust so the distributions are not subject to personal liability.
The bottom line is that a company’s owners and executives need to aware of their options and employ these in advance of a future lawsuit or other type of legal or regulatory claim that may arise. One of the best ways to level the litigation playing field is to place the assets out of reach of future potential plaintiffs or convert non-exempt assets to exempt assets ahead of any future claim. Once this is done, your company will be very unattractive to any overly litigious plaintiff attorneys who only get paid if they recover assets from the judgements they obtain. Asset protection planning neutralizes this.