Lawsuits Are A Plague On Small Businesses—Here’s What You Can Do

Small business owners take a lot of risks to be successful. Nothing ventured, nothing gained, right?

But risks can create stress. Dealing with difficult customers, and worrying about employees all contribute to the headaches. Even a self-employed real estate investor who doesn't have "customers" or "employees" has a ton of problems to keep him or her awake at night.

The threat of litigation is another major concern for business owners. About three-quarters of all owners worry about this on a daily basis.

Lawsuits Are The Scourge of the Small Business Community

Over half of all civil lawsuits involve small businesses. A company with $1 million in earnings wastes about $20,000 per year on lawsuits. In sum, small businesses pay $20 million of their own money to settle tort liability claims or satisfy jury awards.

While major corporations have the resources to devote to both the time and costs of lawsuits, as an owner of a small real estate investment business, you do not. Therefore, you must protect your assets and give potential plaintiffs no incentive to sue you.

Insurance Is Not the Answer

Most diligent business owners turn to general liability insurance and similar coverages to protect their assets. While well-intentioned and a necessary step for any company, small business insurance is not enough. That’s because insurance companies are businesses as well. They readily accept your premiums and may even be helpful for minor issues like a slip-and-fall case.

But things turn sour when you file a big claim. You may get dropped and have to go through the hassle of suing the insurance provider to honor your claim. Instead of helping, the insurer will blame you or manufacture exceptions to your policy that void the claim.

Protecting Your Small Business Assets

So you can’t rely on insurance when you face a major lawsuit targeting your real estate assets. Instead, you must rely on another asset protection strategy. This involves two components—anonymity and series LLCs.

Anonymity

The prospect of lucrative settlements or significant jury awards drives lawsuits. In other words, a small real estate investment business must have substantial assets to be worth suing. If you can hide your assets from plaintiff lawyers, you take away their incentive to sue.

The way to hide assets is through anonymous trusts. These own your real estate properties instead of you.

Here’s how they work. You have real estate investments. Each piece of property is owned by an anonymous trust, and the business holding entity is an LLC. This makes it difficult for a plaintiff’s attorney to trace the property back to you. That’s because when the LLC is filed, the anonymous trust is listed as its member. 

When the plaintiff’s attorney researches county records to find the owner of your property, they will simply see the trust listed as the owner. However, trusts are private documents not filed with the state or county. Therefore, the lawyer runs into a brick wall.

Series LLCs

This structure is a great way to protect real estate assets. It works like this. Assume you own three properties in a city, located at:

• 100 North St.
• 100 South Blvd.
• 100 East Rd.

You create a parent LLC, called the series LLC. Then you form a separate LLC for each piece of property. For the three properties here, you would have the parent LLC and three subordinate LLCs. One owns the 100 North St. property, another the 100 South Blvd. property, and the third owns the 100 East Rd. asset.

This structure has several advantages. The main one is that if a plaintiff’s lawyer wants to file a lawsuit against you for something that happened at the 100 North St. property, they will face two major hurdles. First, because of the anonymous trust, they will have a hard time pinning down the actual owner. Second, the only asset impacted by the lawsuit is the 100 North St. property. The other two properties, at 100 South Blvd. and 100 East Rd., are untouchable. So are all your other business assets unrelated to these properties.

In addition to making suing difficult and unproductive for plaintiffs’ lawyers, series LLCs have several other advantages:

• Low startup costs. Your lawyer can easily and inexpensively set up the parent and subordinate LLCs.
• Less complexity. A series LLC, with its multiple LLCs, is a much simpler business structure than a similar setup with a parent corporation and subsidiary corporations. Also, the documentation and requirements are easier for an LLC than a corporation.
• Lower sales tax. While rules vary from state to state, you may be able to avoid any rent paid by one LLC to another.
• Taxation. In most states, only the parent LLC files a tax return. This simplifies an already complex tax filing.

The Series LLC Experts

The attorneys at Royal Legal Solutions focus on protecting our small business clients’ real estate investments and minimizing taxation. Part of this protection may involve the use of anonymous trusts and series LLCs. With this asset protection strategy, you can stop worrying so much about lawsuits and concentrate your time on real estate investments.