Regardless of the type of business you conduct, there is a
significant risk of being sued in our litigious society.
Lawsuits can range from claims of negligence to defective
products to disputes with employees. Incorporating is a
means of guarding against these potential threats.
Single Incorporation – Protecting Your Personal Assets
Incorporating your business is a method for creating a legal
wall between your personal assets and business. Any judgment
against your business will not impact your personal assets.
While your home, savings, stocks, etc., are protected, what
happens to your business? If a judgment is rendered against
your business, the business assets are as good as gone. This
doesn’t have to be the case.
Double Incorporation Strategy – Protect Your Business Assets
Many businesses can benefit from pursuing a double
incorporation strategy. The strategy is designed to address
the situation where a business has significant assets that
are exposed to litigation risk. If you incorporate your
business, it is all well and good that your personal assets
are not at risk. But what if your business has a number of
high value assets such as manufacturing machinery, office
equipment, popular domain name, custom software or other
items? Merely incorporating your business will not protect
these assets because they are owned by the business entity.
Since a successful lawsuit would result in a judgment
against the business entity, all assets of the business
could be seized as part of the judgment. In short, you lose
your machinery, office equipment, intellectual property or
any other item of tangible value. The double incorporation
strategy prevents this scenario.
As the name suggests, the double incorporation strategy
involves the creation of two business entities. The first is
your “at risk” business that interacts with your customers
or clients. The second entity, a “holding corporation”, is
then created to own the valuable assets of your business.
This holding corporation then leases the relevant business
assets to your “at risk” entity. If the “at risk” entity is
sued, the holding company merely recovers its assets and the
plaintiff is forced to settle for pennies on the dollar
because the “at risk” entity has few assets. In essence, the
plaintiff wins the battle, but loses the war.
Most people know that a business entity can be used to
create a protective shield for their personal assets. If
your business has high value assets, now you can use this
double incorporation strategy to protect those assets as
well.
Richard Chapo is the lead attorney for the law firm
– a firm providing
legal advice to California businesses. This article is for
general education purposes and does not address every facet
of the subject matter. Nothing in this article creates an
attorney-client relationship
