Sunday, July 12, 2015|2 a.m.
No company can eliminate the risk of direct exposure to a suit. The good news is that any company can considerably reduce its exposure with a danger mitigation method.
Frequently, the focus of such a method is to decrease accidents and injuries to staff members, clients and business itself. But equally crucial is a plan for the best ways to address a judgment if your company gets sued and loses.
The last thing any small-business owner desires is to pay out of pocket for a judgment against his/her company.
How you chose to form your business will fundamentally impact the degree of your personal direct exposure to a judgment. All companies ought to operate though a legal entity that offers a shield from individual liability. Nevada law provides a number of entity designs that restrict a business’s liabilities, such as corporations, limited-liability business, limited-liability collaborations and restricted partnerships.
Avoid operating as a sole proprietorship or an unregistered basic collaboration. The owners of both can be held personally responsible for the liabilities of the business, including civil judgments.
Possibly more crucial for effective possession protection is keeping company affairs separate from personal affairs. A creditor can seek collection of a judgment against a company straight from its owners if the lender can establish that business is the “modify ego” of its owners.
Under Nevada law, a business is considered the alter ego of its owner when a creditor can establish:
■ That adherence to the legal fiction of a different entity would sanction scams or promote manifest injustice
■ That there is such unity of interest that the business and owner are inseparable
■ That the business is influenced and governed by the owner.
This is known as “piercing the business veil.” Nevada courts look at the totality of the circumstances when deciding whether a business’s veil should be pierced. Certain red flags Nevada courts search for are: whether business funds and personal funds were commingled; whether business is undercapitalized; whether there have actually been unauthorized diversions of company funds for individual use; whether the owners treated business assets as their own personal assets; and whether the owners have observed corporate rules such as holding routine meetings and following the terms of the business’s governing documents.
The more an owner’s individual affairs are intertwined with business’s affairs, the more probable a court will hold the owner accountable for judgments versus business.
Basic steps such as diligently keeping good books and records for the business can protect a business owner. But the very best practice is to talk to an accountant and business planning lawyer who can help develop practices and procedures to keep business’s identity different and apart from the owner’s individuality.
Alexander LeVeque is a lawyer at Solomon Dwiggins & & Freer Ltd., exercising mostly in business and trust and estate litigation.