If you are self-employed and a homeowner you have provided a humongous target and asset for collection of liabilities if a lawsuit is filed against you. Now that you have worked so hard to earn this home, what do you need to do to protect it? There are many things that you can do to ensure that your home does not become part of litigation. Below are a few things you might consider. As with any legal or large business decision, you really should consult with an attorney and your tax adviser and insurer in order to obtain specific advice as to your situation. Below are a few general things to think about.
We’ve all heard the term keep it simple, stupid right? Well, a variation of that applies to your home – keep it separate stupid. In order to avoid the stupid part of this analogy, you need to keep your personal life and business as separate as possible. What does that mean? If you work out of your home, you need to designate particular spaces as work, which help both with a tax advantage and with liability. If at all possible, you should consider moving your home into a separate LLC or trust, so that it is not a personal asset for collection.
Don’t “comingle”. While this sounds like a party term from college days, comingling of funds is the quickest way to allow someone suing you to reach your personal assets. Under Arizona law, if a litigant sues your business, and is able to prove that you have mingled your personal funds with your business ones, they may be able to “pierce the corporate veil”, and sue you personally for any damages your company might pay. These damages may include any equity you have in your home or a lien against your home, if judgment is obtained. Make sure you have separate banking accounts, credit cards, etc. for all of your business expenses. Again, if you run your business out of your home, make sure that you allocate the percentage of business expenses according to your tax accountant’s advice, and keep all of those separate.
2. Consider Putting The Home In An LLC.
As mentioned above, there are ways to structure your home so that it is a separate entity from both you personally, and your business. In doing so, you may limit liability if your business gets sued, if you get sued personally (for example if you are at fault in a car accident or sued for some other negligent conduct personally). If you can keep your home as a separate single asset LLC, it may not be able to be reached for collection for any other purposes. This is something you should consider and speak with a corporate attorney and your tax adviser about. You may also then be able to better deduct your business expenses if you work from home, as you can setup the business to pay a percentage of the mortgage as “rent” directly to the LLC as a corporate entity. This is another great way to properly document business expenses.
3. Get Enough Insurance.
You need to have adequate homeowners insurance and insurance on any vehicles you may have. You also need to consider a general liability policy which is adequate to cover your business, especially if it is run from your home. Further, many people do not consider error and omissions policies. Error and omissions policies are policies which cover you, essentially, for good faith mistakes that you make. You should meet with an insurance provider to determine what insurances are appropriate for both your home and businesses. Do not get cheap insurances. While they are expensive and it is difficult to justify paying for something that you don’t get anything in return for, if there is a claim against you, you will be better served to have adequate insurances. Some of these may also be a deductible business expense, so you need to speak with your tax accountant about this issue.
Make sure that your business, your home, your personal life, is adequately insured, that corporate documents are in place, operating agreements are consistent, and insurances paid for. Keep all of these things handy, and visit them on a regular basis. Make sure that updates are done at least yearly so that things do not lapse.
4. Be a Good Neighbor.
Of course you are new to your neighborhood and hoping to be a good and friendly neighbor to those around you. But you also need to be a legal “good neighbor”. To guard against liabilities, make sure that trees are trimmed, waste is cleaned up, and that you are not creating any hazards on your property. After a rainstorm, be diligent about making sure there’s no standing water around your home, pool, or in any buckets or collection vehicles that may be around. If there are any sinkholes or stray branches, pick them up. This will not only make you more liked in your community, but it will minimize possible liabilities for slip and falls or others. This is especially true if you have vendors or employees coming to your home, landscapers or other maintenance people working in the yard etc.
5. Consider A Will Or Trust.
You now have an asset. You want to consider what will happen to this asset at the time of your death. Do you have children you want it to pass to? Usually once people decide to buy a home, they start to think about long-term planning. It is imperative that you create a will, even if you feel like you hardly have anything by way of assets, earlier rather than later. This can avoid expensive probate, and court and attorney’s fees taking a significant portion of any of your assets, including any equity in your brand new home. Now that you are a “real grownup” with a home, you need to start learning how to protect both it, and your future in it.
Ms. LaFave is an AV Preeminent attorney whose practice focuses on commercial litigation. In that capacity, she primarily represents small and medium sized businesses to protect their interests including in the legal areas of breach of contract, misappropriation of trade secrets and confidential information and business tort claims. If you have questions about protecting your business from litigation, or if you are involved in a lawsuit, please contact her at 480-733-6800. If you are considering purchasing real estate and/or have questions about mortgages, Ms. LaFave recommends contacting Betsie Melter of Realty One Group at 480-734-3644 or loan consultant Caroline Farrar of imortgage at 480-385-0405.