Protecting business owners: When Liability Isn't So Limited

Bill and Don each own shares in a building-supply company with Bill owning 75% of the stock and Don owning 25%. Years ago, they had been told that doing business in corporate form affords the owners a certain degree of asset protection. The problem: that is true if the lawsuit arises out of the operation of the business. But it isn't true if the lawsuit is aimed at Bill or Don personally.

Bill was involved in a minor automobile accident. He was surprised when we informed him that if the plaintiff obtained a judgment against him, nothing would prevent the plaintiff from obtaining his stock in the company making him the controlling shareholder.

Our solution? We converted the company from a corporation to a limited liability company. The result is that there are no shares for the creditor to attach and no possibility of a creditor of one of the owners to seize the assets of the business or otherwise get involved in its operations. Unlike corporate stock, interests in LLCs are protected from claims of creditors in virtually every state.