One frequent topic of conversation with existing and prospective clients relates to the formation of corporate entities, whether corporations, limited liability companies, or partnerships, for risk avoidance and liability purposes.
A recent situation underscored the importance of this issue. Several months ago, R&O established several single purpose LLC entities for a client to hold and operate his various real property holdings. A separate LLC was set up for each property and the various properties were transferred to the LLC’s to avoid potential personal liability on the part of our client. These transfers were structured in a manner where no transfer tax or reassessment occurred based on applicable California Revenue & Taxation Code exceptions.
A few weeks ago, our client was sued when an individual suffered an alleged personal injury on real property owned in Alamo. However, instead of being named personally, the recently formed LLC was the named defendant, thus negating any potential exposure of our client’s other assets. While certain corporate formalities need to be followed subsequent to the formation of a corporate entity in order to successfully avoid a “piercing the corporate veil” argument by a plaintiff, the limited cost and scope of complying with these required formalities are well worth following in order to avoid potential personal liability in litigation.
In this case, while our client was not happy to be involved in litigation, our advance planning successfully thwarted putting his personal assets at risk and R&O successfully negotiated a tender to the insurance carrier, which accepted coverage without reservation.
This recent example was a good reminder that risk avoidance planning through strategic business entity formation does pay actual dividends in the real world.