Bottom Line
Asset protection 101

Written for Land Line by Rick Bell of Harvard Business Services

Owner-operators realize they carry a major liability every minute their trucks are on the road. Insurance coverage stops after your limit is reached.

What would happen to your possessions–the farm, the trucks, the tools–in case of a catastrophic road accident where the judgment amounts to tens of millions? The answer to this question depends on whether the trucker is a sole proprietor, or if he's incorporated.

The sole proprietor who drives his own truck has the least protection. Saving his personal assets from being seized will be almost impossible, especially if he owns the truck involved. He's headed for bankruptcy court, and a serious reduction in lifestyle.

The trucker who incorporates and owns his trucks in the company name, will likely lose the trucks and business assets, but he's in much better shape to save his personal assets (i.e. his farm or home) if he's not the driver. This is the main reason owner-operators incorporate–to separate company assets from personal assets.

This technique is used by millions of business owners. Protecting personal assets if a business fails is why corporations were devised.

Owner-operators who drive their own truck may not get much liability protection by incorporating. They could be sued personally as the driver (plus a suit against their company), which could nullify the protection of their corporation. They should consider putting their family farm or other significant assets in a Limited Liability Company (LLC) to keep them separate from personal assets.

If you're a small fleet owner, there is a better form of protection used by small and large companies. It involves the use of multiple companies. If done correctly, using multiple companies can protect your business. The goal is to reduce your liability to the individual truck involved in the accident, saving all other trucks and business assets from the lawsuit.

Imagine you own three 18-wheelers, a yard to park the trucks and a family farm. The trick is in protecting each asset individually by forming an entity (such as a corporation or LLC) to own and maintain that single asset. You might form an S-corporation as your "operating company." This is the company name under which you work and have your main bank account. This company will hire office help, but not drivers. To protect your trucks, you form three LLCs, each one owning a single truck and the trailer(s) it pulls. Each LLC (truck) hires its own driver. Each LLC leases out its truck and driver to your operating corporation. Now you have four companies (an operating company and three companies that own one truck each).

The farm might be put into an LLC owned by the family. There are some estate planning benefits to owning real estate in an LLC. If the LLC is properly structured, you can take advantage of tax provisions for family ownership. Inheritance taxes can be greatly reduced by putting the farm into a family-owned LLC.

It's also important to remember that each layer of protection comes at a cost. You must weigh that cost against the value of the assets you are protecting. There may be record keeping and accounting costs plus the formation costs for each entity. Higher levels of liability insurance can be purchased but no one can predict the size of a judgment a jury may award in the event of a catastrophic accident.

Once you have a legal structure like this, your protection is at its peak. If one of the trucks is involved in an accident, the chances of losing your business, your remaining trucks, and your personal possessions is greatly reduced, compared to operating as a sole proprietorship.

Once you get used to operating multiple entities, it's not that different from operating as a sole proprietorship. You can still own and control the whole ballgame.

Many truckers enjoy owning and controlling multiple companies. It gives them a peace of mind they never had as a sole proprietor, as well as an important feeling, like you're just a little smarter than the next guy because you are not leaving yourself wide open to people who want to become millionaires through lawsuits.