I could see from the caller ID that Jack was on the line. Jack and his partner, Ray, are new clients. They own and operate a supply company for the energy industry. While sales have fallen off a bit over the past couple of years, the company remains viable and the outlook good. Jack and Ray had decided it was a good time to visit the issue of protecting their business and its assets from potential liability claims.
Jack and Ray own everything together in a partnership. While they have no formal, written partnership agreement, they’ve informally branded their business “Jack and Ray Wholesale Supply LLC.” Some years ago, on the advice of a friend and their CPA, they formed a Colorado limited liability company to serve as their formal business entity. The LLC has no operating agreement, and the only asset titled in the name of the LLC is the operating bank account. The partnership owns a large metal building housing offices, meeting rooms and a warehouse. The partnership also owns a number of trucks of varying sizes, inventory, supplies and equipment.
After exchanging what sounded like strained pleasantries, Jack informed me of the bad news. “We’ve had an accident. One of our people (a longtime employee named Caleb) was making a large delivery of pipes, supplies and a fork lift to a customer near Rifle. He apparently stopped in Parachute for a beer before completing the delivery. It was after hours and he didn’t see anything wrong with that. Well, on his way to complete the delivery, he rolled the truck on the highway and caused a three-car pileup. One person was killed and three others are in hospitals. Their conditions are not yet being disclosed.” Jack also happened to add that Caleb had stopped off for a beer more than once before and been cautioned about it.
Jack and Ray already knew from earlier conversations their LLC offered little asset protection as it was currently structured, so Jack didn’t even bother to ask. What he did ask was if I could speed up the process of restructuring the partnership or if it was simply too late.
There are laws in nearly every state prohibiting the transfer of assets when the intent is to prevent or even hinder known claimants from reaching otherwise attachable assets. I could feel the air of depression that news caused Jack. I interjected, however, that all was not necessarily lost. Engaging in a protective restructuring of assets would still be permissible if we could somehow set aside assets sufficient to cover potential liability to the known claimant. There were many unknowns — how much would need to be set aside as well as the conditions for access, by whom or at whose order. A careful investigation and crafting of the plan offers the best approach, but occasionally we’ll see a restructuring plan that simply exempts the potential named claimant from the protection otherwise afforded by the plan.
The obvious lesson for business owners like Jack and Ray is to act sooner and be proactive in structuring their small businesses rather than waiting until a calamity occurs and then calling a lawyer. The lesser known lesson is that sometimes it isn’t too late for at least some amount of protection against unknown claimants.
Asset protection planning is not only a legal, but also laudable, stewardship activity. The line is crossed only when the motivation is purely to hide from the moral responsibility attached to one’s actions. So long as there are no known or potentially known claimants, one could be said to have a moral responsibility to engage in protective planning. Isn’t there a responsibility to maintain the business and provide for oneself and one’s family?