BUSINESS PRACTICES: LIMITING PERSONAL LIABILITY (Part III)
This is the final part (you can read the previous articles in this series here) to our discussion aimed at helping owners and officers avoid personal responsibility for the obligations and liabilities their companies take on in the course of doing business. The first part provided an overview of the key issues related to corporate liability. The second part focused on what not to do. Here, we get to the juicy part of the discussion: proactive techniques for guarding against personal responsibility.
Choice of Jurisdiction (Domestic)
If you live in Florida, where our firm is headquartered, then you may know about the Florida State Department’s website, commonly referred to as «Sunbiz.» As a corporate law firm, our attorneys spend a lot of time on the website, and it is certainly a very convenient — and transparent– site. Whenever you want to know the owner(s), key officers, company address and registered agent of a Florida company, you can quickly and easily find the information at sunbiz.org. That is convenient for us, but not ideal for owners interested in limiting liability. The first step to limiting personal liability is staying out of the public record.
The Florida State Department’s website is extremely convenient, and extremely transparent — which may not be ideal for all business owners and officers.
If you are doing business in Florida, you will need to have a company registered in Florida. That, however, is not to say you must have a «Florida company.»
You can form your company in a jurisdiction with more favorable corporate laws, such as Delaware or Nevada. In those states, essentially all information about the ownership and management of companies is shielded from the public. In fact, in some states, the state government does not even have access to such information.
Once your Delaware company is formed, you can register it with the Florida State Department. It will be referred to as a «foreign company registered to do business in Florida.» By this means, you will have the anonymity of a Delaware (or Nevada) company while still being able to legally conduct business in Florida.
In addition to the benefit of keeping your name out of the public record, you may also be able to avail yourself of the friendly owner/officer laws in the foreign jurisdiction. Fair warning here. By registering your company in Florida, you are agreeing to be governed by Florida law. Nonetheless, if your company is organized under the laws of a foreign jurisdiction, there are situations where you may be able to apply the more favorable laws instead of those of Florida.
If you like the idea of shopping for a jurisdiction with laws and procedures that most benefit your situation then–in addition to Delaware and Nevada–consider Alaska, Wyoming, Montana, and South Dakota as well. All of these states have made conscious decisions to pass legislation that will encourage companies to incorporate there, even if the companies actually conduct business in other states.
The next step up from incorporating in another state is to «go offshore.» That means you can form your company in another country and then register it to do business in the state where you live. This process is not as complicated as you might think. The first step, of course, is deciding which offshore jurisdiction would be most favorable for your situation. As a Florida law firm, we tend to stick with the Caribbean countries that are close to home. Three countries with business-friendly laws are Nevis, Cook Islands, and Saint Vincent and the Grenadines.
You will notice the discussion here is not about minimizing tax liability or protecting assets. Many times those issues go together with limiting owner liability, but tax planning and asset protection are topics too complex to deal with in this short article.
For purposes here, just be aware that you can find even more favorable laws by going offshore than you can by incorporating in a different state. If you want to know the downside to organizing your company offshore, here are a few considerations:
- A bit more expensive–not terribly so, but a bit. Annual fees tend to be higher than in US states.
- A bit more of a hassle. Florida companies can literally be set up online. It does not get much more convenient than that.
- Can raise a red flag. Given the political and legal climate these days, banks and other businesses may be wary of doing working with your offshore company. You may also draw scrutiny from the taxing authorities.
As a business lawyer, I try to look at all the pros and cons of the available options and make a recommendation based on the client’s particular situation. I do feel offshore companies provide an excellent vehicle for limiting personal liability. In many cases, going offshore may be overkill . . . but it is certainly good to be aware of that option.
Many new companies are formed without much thought for the governing documents. That is a mistake for many reasons, but we will stay focused on personal liability here. First, what are governing documents?
The company’s governing documents are those that set out the basic structural information–i.e. owners, managers, officers, voting rights, board members–and establish the company’s bylaws. Most often, the structural information is contained in the company’s Articles. For corporations, the document is call the «Articles of Incorporation» while, for limited liability companies, it is called the «Articles of Organization.» This is typically a pretty basic document and, in Florida, it is actually generated automatically by the State Department when you establish a new company.
Realize organizing in a business-friendly state, such as Delaware, or in an offshore jurisdiction means there is no public record of the ownership or management of the company. How are you going to prove the company is yours or that you have authority to sign for the company?
Make sure, at a bare minimum, you have company Articles.
Next, there are company bylaws, which can be called by a few different names, just to keep things interesting:
- corporate charter
- partnership agreement
- operating agreement
- shareholder agreement
The bylaws are much more comprehensive and usually include policies and rules about company decision-making, board meetings, admission of new members, officer duties and authority . . . and indemnification.
This may sound a bit ridiculous, but simply having a clause in the company bylaws stating owners and officers are indemnified from company liability is really quite effective. Courts will respect that simple clause.
As discussed in Part II of this series, it is important to set up your company in a way that makes it clear you are serious about establishing a viable company–as opposed to a «throw-away» company that you can just discard once the walls start closing in. Having decent-looking company documents, preferrably drafted by a corporate lawyer, goes a long way toward demonstrating your good-faith in this regard. Further, you can actually build in personal protections in the bylaws that will hold up surprisingly well. The cost is not prohibitive, and any contract attorney will have templates that can be modified to your situation, so there is really no reason not to take this measure. If you choose not to, you do so at your own peril.
Limiting personal liability is a form of asset protection. Understand there is a sliding scale ranging from the very simple to the very sophisticated. There are lots of things you can do to protect yourself though, admittedly, for many small businesses, some of the available techniques would be overkill. A good business lawyer will not try to sell you on a complex structure involving trusts, offshore entities, limited partnerships, etc. unless the benefits of doing so make good business sense.
This article is purposely limited in scope. It is not intended to touch on all the techniques you might use in setting up a new venture. Business attorneys understand the realities of controlling costs in the early stages of a new endeavor. Rather, the points touched upon in this series are more or less the bare minimum you need to know and do to protect yourself as a business owner or officer.