¶ 4701
Overview
Scope of the chapter. This chapter addresses the protection of business owners and professionals. It covers the limits of the liability shield that business entities provide, the special rules for professional practices, the separation of an operating business from the real estate, intellectual property and equipment it uses, secured lending by owners to their own businesses, the position of a creditor of the owner who seeks to reach the owner's interest in the business, personal guarantees and the statutes that impose personal liability on owners and officers, captive insurance companies and retirement plans for practice owners, and planning before the sale of a business. It closes with an assessment of businesses in the Threat Matrix.
Two distinct problems. Business owners face two distinct asset protection problems. The first is inside liability: claims against the business itself, arising from its contracts, products, premises, employees and operations, which the owner wishes to confine to the business so that they do not reach the owner's other assets or the business's own valuable assets. The second is outside liability: claims against the owner personally, arising from the owner's own conduct, guarantees or personal life, which the creditor seeks to satisfy from the owner's interest in the business. Entity structure addresses both problems, but in different ways. Separate entities contain inside liability. Charging-order protection and the form of the owner's interest address outside liability (see supra ch. 16).
The limits of entity planning. The cases show three limits on what entities achieve. An owner who commits or directs a tort is personally liable for it whatever entity he acts through. A creditor may disregard the separateness of entities that are not operated as separate businesses, by piercing the veil, by reverse piercing to reach the entity's assets for the owner's debts, or in bankruptcy by substantive consolidation. And statutes impose personal liability on owners and officers for particular obligations, including withheld taxes, construction trust funds, certain wage claims and multiemployer pension withdrawal liability. Entity planning is therefore one layer of a business owner's protection, which must be combined with insurance, with the owner's personal planning, and with the discipline of operating each entity as what it purports to be.
Relation to other chapters. The law of entities, veil piercing and charging orders is addressed in chapters 15 and 16 (see supra chs. 15, 16). Insurance, including captive insurance, is addressed in chapter 14 (see supra ch. 14), and retirement plans in chapter 13 (see supra ch. 13). Real estate held by a business or its owners is addressed in chapter 48 (see infra ch. 48). The profiles of physicians, founders and developers, whose businesses are addressed here, are set out in chapter 51 (see infra ch. 51).