How safe are the assets in your restaurants? Are you personally liable for your restaurant’s liabilities? These are two of the most common questions we get from our restaurant owner clients, so we thought we would share five of the top strategies we use to shield our restaurant owners from liabilities at their restaurants, which are shown below.
Always Form An Entity To Operate The Restaurant
The best and easiest strategy to avoid personal liability is to form an entity. This can be any legally recognized entity, from a limited liability company to a limited partnership. The key here is filing the entity and operating it apart from your personal assets. It’s also a great idea to separate the restaurant entities from their assets and to own each restaurant as a separate and distinct entity. In other words, if you own the real estate on which the restaurant sits, use an entity to own it, and lease the space to the operating entity that runs the restaurant.
Avoid Personal Guarantees
Avoiding personal liability on contracts is not always possible, but restaurant owners really should avoid them whenever possible. Most lenders require a personal guaranty when you start out and often for many years of operation thereafter. However, there are some lenders who shoulder the investment risk without a personal guaranty, and there are many who will agree to reducing the personal guaranty over time, which is called a burn-off. Restaurant owners who are able to avoid these types of guarantees often sleep much better at night.
Have Adequate Amounts Of Insurance
Aside from contractual personal liability shown directly above, most other types of liabilities can be hedged with insurance. This is generally common sense, but many mistakes are made because of inadequate insurance. Once the policy limits are met, personal liability can kick in, so make sure you have enough.
Avoid Commingling Personal Assets
The single biggest error that we see as attorneys comes from restaurant owners who comingle their personal assets with their business. For example, you cannot run your personal groceries, dry-cleaning, and gas for your personal car through your business and expect that business to insulate you from personal liability.
Divest Yourself of Personal Assets
You may have considered or at least heard of the above strategies, but this last strategy of removing your assets from your personal ownership is probably the best way to avoid personal liability. You’ve probably heard the phrase, “You can’t get blood from a turnip.” The same applies here. If you own nothing, then even when you are sued, the successful plaintiff will find it very difficult (if not impossible) to get anything. Further, this can actually help you avoid lawsuits, because your attorneys then get to show the other side how useless it is to pursue the lawsuit. It can be tricky to keep your assets out of your personal ownership, but it is an extremely successful strategy to avoid being liable.
Have you been sued personally? Please share your experiences. We’d like to hear about them!
About The Author: Matthew Sanderson is a restaurant lawyer in Texas. “Good service with a smile” is his motto. Click here to find out more about Matthew Sanderson’s legal practice and how he can help you today. Follow him on Twitter @dealattorney.