One of the ways to describe my job as a lawyer representing businesses is as a risk manager. Sometimes I advise about the legal risks associated with a particular decision or business deal. In other situations, as a litigator, I am advising about the risk associated with litigation strategies and going to trial—sometimes for cases involving hundreds of millions of dollars.
Many of us manage risk in our farm and ranch by creating corporations or LLCs. This attempts to limit liability against those who try to recover against assets of the corporate entity.
Here is an example. A ranch or feedlot decides it wants to add a truck to its business and also haul cattle for others, but it considers putting the trucking business into a separate LLC to isolate the risk of liability. I am sometimes asked if such a strategy will limit the ability of potential creditors to reach other assets owned by the owners of the LLC or corporation. The answer is probably, if you follow some basic rules.
There is a laundry list of factors courts consider when a creditor tries to “pierce the corporate veil” and reach other assets owned by a shareholder or member of the entity in their individual capacity. Those include failure to observe corporate formalities, co-mingling of assets, using the corporation to engage in fraudulent activity, or complete lack of adequate capitalization.
Just because you fail to follow one or more of these factors does not mean you will lose the benefit of the protection of a corporate entity, but the more you follow the better—and vice versa.
In addition to utilizing LLCs and corporations, one of the most cost-effective protections an individual can obtain is an umbrella liability insurance policy. In our line of work, people can get injured—sometimes badly. While an ordinary, general liability policy with a million-dollar limit might sound like a lot of coverage, if someone has a lifetime injury on your operation, it will not go far. That is where an umbrella policy can come in.
The umbrella policy requires you to maintain certain underlying coverages, and if and when those coverages are exhausted, the umbrella policy kicks in. A multi-million dollar umbrella liability policy can provide protection and peace of mind for a relatively modest cost.
In my experience, a $5 million umbrella policy costs less than a $1,000 a year. Talk to your own insurance provider about your specific options, but this approach can provide coverage for a relatively small amount of money upfront. Many farm and ranch operators are experienced at minimizing cash costs, while sitting on millions of dollars of net worth. This level of protection is a must for large operations.
Having a successful business is not just about making money and investing prudently. It is also about protecting what you already have from unforeseen risks that could take your hard earned money away from you.
Source: Robert Thompson, Drovers