Asset Protection: The Filing Entity

asset protectionOften, new entrepreneurs start their small businesses and are quickly consumed with the seemingly unlimited number of tasks necessary to survive to the next day.  In the whirlwind, it is easy to avoid thinking about abstract concepts like risk management.  What type of entity?  Who has time for such trivia?

After five years of painting for his friend’s dad’s house-painting business, Sam decided to go into business for himself.  Over time his business grew, he had three crews working for him, and he started putting money in a savings account with plans to buy a house in a couple years.  Six months away from his savings goal, he got a call that one of his painters spilled a bucket of paint inside a big River Oaks house, destroying the dining room rug.  Sam called his insurer who told him that the antique Persian rug exceeded his policy limits and that his policy contained a “your work” exception preventing coverage for this type of event, regardless of his policy limits.  Generally, a properly-maintained filing entity would have protected Sam’s savings account.  Lack of a filing entity exposed Sam’s savings account and every other non-exempt personal asset to his business debts and liabilities, such as for damage done by a spilled paint bucket.

Every business is an entity, but not every business is a filing entity (an entity formed and maintained through the Texas Secretary of State).  Without action, a business is considered either a sole proprietorship or a general partnership.  These two types of entities provide no asset protection—no shield between personal assets and business debts and liabilities.

The most common filing entities are corporations and limited liability companies (LLCs).  Properly maintained, the filing entity is treated as a separate person under the law.  For this reason, the debts and liabilities of the filing entity are those of the company and not the owner.

The attorneys at Waldron & Schneider are well versed in the various options for business owners wishing to take advantage of the benefits of formal business formation in Texas.  If you currently operate a business which is not a filing entity and wish to speak to an attorney about these options and benefits, please contact us at your convenience.

[Disclaimer]

The legal information in this blog entry is not intended to be a substitute for seeking personalized legal advice from an attorney licensed to practice in your jurisdiction.  Further, nothing contained in this article is intended to create an attorney-client relationship with any reader.  This article and website are made available by Waldron & Schneider for educational purposes only and to give basic information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and Waldron & Schneider. The article and website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
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