Strategies for Shielding Your Business from Class Actions

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RISMEDIA, March 28, 2008-(MCT)-You’ve done everything right. Your business is ethical, and it emphasizes helping its customers. Still, even the best-run companies can face personal-injury and class action lawsuits over their products and services. Here’s how to protect your corporation and your personal assets:

– Think about organizational structure.
Entrepreneurs have a few options when they’re incorporating. They can form corporations, general partnerships or limited-liability companies. Business owners often choose from those possibilities based on how they want to limit their tax burdens.

But Nancy Rapoport, the Gordon & Silver Ltd. Professor of Law at the Boyd School of Law at the University of Nevada, Las Vegas, said they should also ask for advice on which type of organization offers the best protection of their personal assets. LLCs, for example, typically guard owners’ personal property a little more effectively than corporations. General partnerships are “the riskiest” for personal-asset protection, she said.

– Follow the laws your organizational form requires.
It’s not enough to sign incorporation papers, Rapoport said. Business owners also need to follow every rule and regulation governing the type of company they’ve established, or the operation’s status as a corporation that defends personal assets could be null.

Not honoring the laws of the business type they’ve chosen is the “main mistake” entrepreneurs make, she said. Common mistakes include ignoring bylaws, not having a corporate board and using business assets for personal objectives.

“It’s piercing the corporate veil,” she said. “The law says that if you’re not careful about keeping the business entity separate from your personal assets, or if you’re using the business entity as your own personal set of assets, then people can go after you personally. If you start using your LLC as your own personal piggy bank, then you have not respected the (corporate form).”

– Keep up with written policies.
Businesses also create liabilities when owners fail to hew to the day-to-day operating procedures laid out in manuals and guidebooks. If a company has written policies on how to use company supplies, for example, and an executive overrides those policies with a verbal order, that can cause problems later.

“You have all sorts of messiness people can latch onto,” Rapoport said. “They can say, ‘You didn’t even follow your own written rules.’”

There’s just one thing worse for a company’s liability defense than ignoring rules: Ignoring rules and lying about it.

– Understand that bankruptcy is a mixed bag.
If a business files for bankruptcy before plaintiffs can get a judgment and collect on it, then those plaintiffs become unsecured creditors and go practically to the end of the line among entities entitled to a company’s assets.

But a business that’s solvent will still have to pay its creditors 100 cents on the dollar, and if they’re very solvent, they’ll even have to pay interest to creditors, Rapoport said.

“Bankruptcy is not an automatic get-out-of-debt-free card,” she said. “It’ll help a company restructure some of its debt, but it’s not an escape clause.”

Bankruptcy can help in cases in which company owners had to sign personal guarantees on office or equipment leases, for example. For new businesses without credit histories, owners will often have to personally assure vendors that they’ll cover an agreement in times of trouble. Bankruptcy won’t cancel out an executive’s personal liability on those contracts, but if business is drying up thanks to a lawsuit and a company is having problems meeting its rent, bankruptcy can halt foreclosures and stay ejection proceedings for a while, Rapoport said.

Copyright © 2008, Las Vegas Review-Journal
Distributed by McClatchy-Tribune Information Services.

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