Protecting the House
When you started your brokerage, bought it, or stepped into a leadership role, you were counseled on the brokerage business operating as an LLC, a corporation, or some other legal entity. You formed the entity to get the business going, you bought into the entity, or you formed your own entity when you took over the business from your predecessor.
That was a good start, but just forming the legal entity (the LLC, corporation, etc.) is not enough on its own to protect your business in a catastrophic injury case or similar high dollar litigation. As an industry we are all eagerly awaiting the U.S. Supreme Court’s decision in Montgomery v Caribe Transport II, LLC. Hopefully, the Court brings sensibility to the nuclear verdict risk landscape brokers face today. But motor vehicle accident cases are not the only risks brokers face. Exempt v non-exempt wage and hour class action lawsuits, slip and fall cases, debt obligations, and more threaten brokers.
Keep those risks inside your business, and away from your other assets by practicing good corporate governance regularly. (1) maintain good accounting practices, (2) respect and keep up business formalities, and (3) make the money make sense
- Maintain good accounting practices. I am not an accountant. I do not know all the GAAP rules. I know enough to know to protect yourself from personal liability and keep business liabilities inside the business, the business needs good accounting practices. Utilize trusted accounting advisors, document accounting activities consistently and accurately, and most of all, separate the business’ money from your own. In virtually every case where an owner is found personally liable for a business’ liabilities (excluding fraud cases and personal guarantee cases), it is clear the owner treated the business’ money like their own money. There was no clear separation, there was not consistent documentation of business transactions, distributions/owner pay, etc.
- Respect and keep up business formalities. This does not mean you need to spend a ton of time every year documenting every little business decision but do take the time to have a board meeting or a shareholder meeting and take down minutes for the meeting for your corporate records. Keep a current record of the legal entity’s officers and record when changes are made. If you are putting money into the business, record it. If you have multiple entities that work together or share services from a management company, get service agreements in place, get trademark license agreements in place. When you run multiple businesses, show the world the businesses are independent with good, separate accounting practices, written contracts that make sense for all parties, and keep corporate records current.
- Make the money make sense. No matter what you do, in any major litigation the plaintiff’s lawyer will attack your money decisions. They will allege the business does not have enough insurance or money in the bank. They will call you irresponsible and try to “pierce” your corporate veil and go after any other assets you may have. The good news is courts are not in the business of nitpicking business decisions. If you carry $5 million in truck brokerage liability insurance, courts are not inclined to declare you should have maintained $7 million. If you need $1 million in cash available to operate your business each month, courts are not inclined to declare you should have $2 million in the bank at all times. How much insurance you carry, how much money you keep in the bank, how you finance your business, manage your cash, etc. are business decisions and courts will heavily defer to businesses to make their own business decisions. But courts will step in, and they will agree with plaintiff lawyers if the money does not make any sense. The insurance decisions, cash flow decisions, and financing decisions you make need to make a little bit of sense. When courts favor plaintiff lawyers in these attacks, businesses are running $100 million/year businesses with only a $1 million insurance policy and a few thousand dollars in the bank. The point is, make sure the money – the financing, the cash flow, the insurance, any intra-company transactions make sense. If they are reasonably justifiable, courts will give you a lot of deference.
Protect your business, protect your house with good corporate governance practices.