Restaurant Hospitality Owners Have a Huge Bullseye on Their Back When It Comes To Personal Liability and Lawsuits. Here Are Things To Do in Advance of a Lawsuit To Make You Less Attractive.

November 9, 2021

Photo courtesy of Gage Hospitality

When you own a restaurant, or any business for that matter (especially in New York), you’re almost automatically going to be subjected to many different types of lawsuits and claims. As a result, it’s extremely important, ideally before you start your business, but in any case, before the threat of a potential lawsuit looms over your head, to take appropriate measures to protect and shield your personal assets to the fullest extent allowed by law. One of the best ways to shield your personal assets from these potential lawsuits is to develop an asset protection strategy, both on a corporate and personal level, which in turn assists in siloing risk.

Starting off, you want to make sure that your business is owned by an entity. Commonly used entity types are limited liability companies and corporations. These entities, if created legally and correctly, can help provide an initial layer of protection – the reason being, if the business is subjected to a lawsuit, it is generally the assets of the business, and not those of the individual business owner’s, that a potential judgment would get entered and executed against. However, the mere creation of a legal entity to own the business may not, in and of itself, be sufficient to protect you from being found personally liable for the debts of the business. For example, under §630 of the New York Business Corporation Law, the ten (10) largest shareholders of a corporation can be held personally liable for unpaid wages payable to employees of the business. That means that, if a business in NY is owned by ten (10) or less people, each and every one of them can potentially be held personally liable for unpaid wages owed to employees of the business. Accordingly, personal liability in such cases, by statute, cannot be evaded. So, how can business owners protect themselves and their personal assets in such a case? Below is an example of additional steps that can be taken (depending on various factors and elements) to further insulate yourself (and your personal assets) from liability in a potential lawsuit; however, please remember, that this is a mere example, and should not be interpreted as a guarantee that an individual who owns a business in an entity cannot be subject to personal liability for debts of that business or entity –  these cases are very fact-specific and how they play out for any party involved will ultimately depend on a myriad of legal and factual issues. 

A possible second step to take to add further protection against potential personal liability would be the creation of a sub-entity to own and hold (in lieu of you personally owning and holding) the shares or membership interests of the business entity itself. This creates a second layer of protection between the lawsuit and your personal name and assets, and in turn, adds a second hoop for a potential plaintiff to jump through when trying to recover against the assets of an individual business owner.

Is that all that can be done? No! You can take the above example even further (after all, protecting your name and personal assets is extremely important!). A third step that can be taken is the creation of a “holding company” to own the sub-entity mentioned in step two above. This provides a third layer of protection. So, say that you have 3 businesses – based on the structure laid out above, you will form 3 entities, each to own their respective business, with each of the 3 entities being owned by a different sub-entity (so there’d be 3 sub-entities in total), and upon taking this third recommended step, each of the 3 sub-entities would be wholly owned by a single holding company, adding an additional layer of protection to your personal assets. Upon taking the 3 steps described above, and without doing anything else, the only asset that you will personally own in your individual capacity, as it relates to the 3 individual businesses, is the equity in the holding company.

Is there anything else I could do? Why yes, of course there is! As a fourth possible step to increase protection, you can create a trust to own and hold the equity in the holding company described in step 3 above. The trust can be revocable or irrevocable, depending on the situation, and the trust should be established in a “trust friendly” state to seek ultimate protection. As always, you should consult with an attorney to decide on which type of structure (including the type of entity, sub-entity, holding company and trust you elect to create, if any) makes most sense for you and your business, from a legal, cost and tax perspective. You should also keep in mind that, the jurisdiction you and your business are located in, as well the timing of (and circumstances relating to) when and how you structure (or restructure) the ownership of said business, are all relevant considerations that should be taken into account when contemplating the creation or restructuring of a business (e.g., statutory look-back periods, lease and loan document restrictions, and potential fraudulent conveyance claims, are some examples that can affect whether and how a business’ ownership gets restructured).

If all of the above steps are taken and effectuated correctly and properly, you have essentially created an intricate safeguard of your personal assets from potential debts and liabilities of your business. Although it may not be possible to entirely shield one’s personal assets from potential creditor claims in all cases and under all circumstances, the idea is that, by taking some or all of the above-described steps, you may potentially (i) deter a potential plaintiff (and its counsel) from suing you (and maybe even your business), (ii) make the pursuit of any potential claims more costly, time-consuming, and overall more difficult to succeed on, and (iii) reduce the likelihood of recovery against your personal assets.  

For more information, or for help (re)structuring the ownership of your business, or (re)negotiating your business’ lease agreement, reach out to the knowledgeable business and real estate attorneys at KI Legal.

Founded by attorneys Andreas Koutsoudakis and Michael Iakovou, KI Legal focuses on guiding companies and businesses throughout the entire legal spectrum as it relates to their business including day-to-day operations and compliance, litigation and transactional matters.

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This information is the most up to date news available as of the date posted. Please be advised that any information posted on the KI Legal Blog or Social Channels is being supplied for informational purposes only and is subject to change at any time. For more information, and clarity surrounding your individual organization or current situation, contact a member of the KI Legal team, or fill out a new client intake form.