by Quenda Behler
Whenever I speak somewhere, I preach about the importance of
separating your personal assets from your company's assets. The
best way to do this is by incorporating your business as a
corporation or an LLC.
Incorporating a business creates a fictional legal "person"
— the corporation — that you work for as an
employee. As long as this fictional legal person remains alive
— and it does remain alive even if its founder and owner
do not — the corporation's debts are owed by the
corporation, not by the person who started the company, not by
the people who own it now, and not by the people who will
inherit it later on. The corporation can be successfully sued,
but the owners cannot.
I bet I've said that a million times, but apparently not even
my friends listen to me. Last week I got a frantic phone call
from an old friend whose husband owned a concrete company. Just
before his recent death, he made a mistake — a serious
mistake — mixing the concrete for a foundation. The
customer said he intended to sue. When my friend told him her
husband had died, the customer said, "Fine, I'll sue you
What Happens Now?
So what's the likely outcome of such a lawsuit? Is my friend on
her way to the poorhouse?
It depends. If the concrete company is a corporation, it can be
sued for bad work — but the people who own it can't. If
the company is incorporated, such assets as my friend's home,
vacation cottage, and personal bank accounts, as well as
proceeds from her husband's insurance policies, will be safe;
they won't have to be used to pay the company's debts.
Suppose you are in a similar situation. No one has died but
you've made a terrible mistake on a construction job and are
going to be sued. You should have incorporated, but you didn't.
Is everything lost? Could you incorporate now?
Yes, you could incorporate now, and you probably should. After
all, you might make another mistake tomorrow.
However, it's too late to protect your personal assets from
being reached by this particular irate customer.
Is there anything else you can do?
What Won't Work
Let's talk first about what won't work. Transferring everything
you own into your spouse's, mother's, or best friend's name
won't work. Transferring title of assets is the traditional
response to this problem — but I'm here to tell you that
if you pursue this angle, you're wasting your time.
You think we lawyers never heard of that trick? We'll put you
under oath and ask you about recent transfers, and we'll serve
you with a subpoena that requires you to bring in all of your
company's business records. If you don't answer truthfully or
show us all the company's papers, you'll be committing
We ask about "recent" transfers in particular because recently
transferred property can be recaptured for the benefit of the
creditor. A transfer that took place some time ago is much
harder — sometimes even impossible — to reach.
Exactly how hard depends on how removed from the company the
person you transferred the assets to is.
The law varies from state to state, but in general a court that
finds that you transferred assets to avoid paying a debt will
consider that transfer fraudulent, and it may come after you
and the person you transferred the assets to.
Going out of business won't work, either — not if your
business isn't incorporated. The debts of a sole proprietorship
or a partnership will survive and can be collected long after
the company itself is gone.
What Might Work
Eventually, of course, the statute of limitations on debts and
claims will cause the debt to become uncollectible. The idea is
that debts shouldn't hang over a person's head forever, so
state law puts a limit of a certain number of years on the life
of a debt; still, in the meantime your life could get very
There are steps your lawyer could take to help you immediately.
A Chapter 11 bankruptcy or reorganization would allow you to
stay in business and would give you some debt relief. Or your
lawyer may be able to negotiate a payoff that's less than the
full amount and persuade the creditor to take it on the theory
that a bird in the hand is worth two in the bush.
As for my friend, it turned out that her husband's company was
not incorporated. How much trouble she's going to have with
this debt hinges on how involved she was with the company. She
needs a lawyer immediately — and a psychic who could
contact her late husband and tell him what a fool he was for
not getting his company incorporated while he had the
Quenda Behler Story, author of The Contractor's
Plain-English Legal Guide, has practiced and taught law for
more than 25 years.