Guest column: Keep personal, business liabilities separate

Alexander LeVeque

Sunday, July 12, 2015 | 2 a.m.

No business can eliminate the risk of exposure to a lawsuit. The good news is that any business can significantly reduce its exposure with a risk mitigation strategy.

Commonly, the focus of such a strategy is to minimize accidents and injuries to employees, customers and the business itself. But equally important is a plan for how to address a judgment if your business gets sued and loses.

The last thing any small-business owner wants is to pay out of pocket for a judgment against his or her business.

How you chose to form your business will fundamentally affect the degree of your personal exposure to a judgment. All businesses should operate though a legal entity that provides a shield from personal liability. Nevada law provides a number of entity models that limit a business’s liabilities, such as corporations, limited-liability companies, limited-liability partnerships and limited partnerships.

Avoid operating as a sole proprietorship or an unregistered general partnership. The owners of both can be held personally liable for the liabilities of the business, including civil judgments.

Perhaps more important for successful asset protection is keeping business affairs separate from personal affairs. A creditor can seek collection of a judgment against a business directly from its owners if the creditor can establish that the business is the “alter ego” of its owners.

Under Nevada law, a business is considered the alter ego of its owner when a creditor can establish:

■ That adherence to the legal fiction of a separate entity would sanction fraud or promote manifest injustice

■ That there is such unity of interest that the business and owner are inseparable

■ That the business is influenced and governed by the owner.

This is known as “piercing the corporate veil.” Nevada courts look at the totality of the circumstances when deciding whether a business’s veil ought to be pierced. Specific red flags Nevada courts search for are: whether business funds and personal funds were commingled; whether the business is undercapitalized; whether there have been unauthorized diversions of business funds for personal use; whether the owners treated business assets as their own personal assets; and whether the owners have observed corporate formalities such as holding regular meetings and following the terms of the business’s governing documents.

The more an owner’s personal affairs are intertwined with the business’s affairs, the more likely a court will hold the owner liable for judgments against the business.

Simple steps such as diligently keeping good books and records for the business can protect a business owner. But the best practice is to consult with an accountant and business planning attorney who can help formulate practices and procedures to keep the business’s identity separate and apart from the owner’s personal identity.

Alexander LeVeque is an attorney at Solomon Dwiggins & Freer Ltd., practicing primarily in commercial and trust and estate litigation.