For the small business owner, the liberal availability of pre-trial discovery is one of many risk factors inherent in litigation.

For the small business owner, the liberal availability of pre-trial discovery is one of many risk factors inherent in litigation.

When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

For a small business owner navigating the court system, there are a number of inherent economic disadvantages when being sued.

When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

For a small business owner navigating the court system, there are a number of inherent economic disadvantages when being sued.

For a small business owner navigating the court system, there are a number of inherent economic disadvantages when being sued.

As part of a comprehensive asset protection plan, it is important that the small business owner avoid day-to-day liability risks. A vital piece of any plan prepares for the likelihood that a small business owner someday will end up in court.

When navigating the court system, the risk of loss from contract and tort liability can be significant for small business owners because the operation of a business naturally involves exposures to liability. Further, limited liability will not protect the owner of a personal service business (e.g., an accounting firm) who personally commits a tort.

When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

The undercapitalization theory is one of two ways a court can pierce the veil of limited liability that protects an owner from liability for the business's debts.

Besides application of the alter ego theory, there is another way a creditor can pierce the veil of limited liability.

In almost every case where courts have pierced the veil of limited liability based on the undercapitalization theory, the courts were influenced, in large part, by a finding that ingredients also were present to pierce the veil based on the alter ego theory. Thus, avoiding the alter ego theory can be a major component in avoiding the undercapitalization theory as well.

In order to avoid application of the alter ego theory, not only must an owner separate personal and business affairs, but also separate activities among different business entities.

A failure to hold required meetings or execute written waivers has been used to pierce the veil of limited liability in numerous cases through application of the alter ego theory.

To avoid court application of the alter ego theory, it is important to separate and document ownership of assets.

In some instances, the small business owner will personally own mixed-use assets, used for both personal and business purposes. Good examples are a home where the owner has a home-based business, a computer and an automobile.

Under the alter ego theory, the creditor seeking to pierce the veil of limited liability must prove that the owner did not operate his limited liability company (LLC) or corporation as if it were a separate legal entity.

Co-mingling of assets involves the owner using business resources for personal purposes, or the business using the owner's personal resources for business purposes. Co-mingling is also a primary basis upon which courts apply the alter ego theory when a creditor seeks to pierce the veil of limited liability. When the rules regarding separation and documentation are followed, co-mingling of assets should not occur.

The management structure and operating rules for the limited liability company (LLC) and statutory close corporation are extremely flexible. There are only a few rules imposed on these entities by statute. This can be a real advantage in terms of asset protection.

As we've discussed elsewhere, an owner can fund the business entity as an owner and as a creditor with debt such as leases and loans when using operating and holding companies.

When someone performs services for a business, he may be deemed an employee or an independent contractor. The differences between the two are highly significant, as explained below.

Among the tort exceptions to limited liability for a small business owner is selling or hiring in a personal capacity. Doing this could negate carefully constructed asset protection plans.