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Will a Personal Judgment Cost You Your Business?
By Bev Day, MBA, CFE

Fred was shocked. Everything he had worked to build for 20 years was about to be taken away.

Months earlier, he had an auto accident and two people were seriously injured. They sued Fred for payment of medical bills, pain and suffering. His personal assets didn’t cover the claim and his insurance company only paid a portion of the expenses. He thought no one could touch his company assets, but the court awarded the shares he owned in his own company to the claimant.

Imagine if you were personally sued for a matter unrelated to your business. Like Fred, you struggled through all those entrepreneurial challenges: planning, financing, and marketing your business. Now it is successful; you have the protection of the corporate veil; you have nothing to worry about. Or do you?

Many small business owners don’t know about the asset protections available under law. Large businesses understand them; that’s why they have teams of accountants and lawyers looking out for their interests. Small business owners usually don’t have resources to learn how to protect themselves against risks of lawsuits and take action.

Pay attention. If you own controlling shares in a C corporation like Fred did, you could lose them in a judicial settlement. The shares you hold in your corporation are considered personal property, hence they could be taken away.

You may say, “That doesn’t make sense.” But here’s the kicker. When the court gives the injured party the authority to take your personal property, this includes your stock shares. The claimant becomes the majority owner (assuming you own more than 51% of the stock in your corporation). He can then hold a shareholders’ meeting and resolve to liquidate your corporation to satisfy his claim, selling your corporate assets and taking the funds. All you can do is watch.

Originally published in My Tech Lawyer, 2002

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