Using LLCs to Manage Risk

Last Updated on Thursday, 14 July 2011 04:02 Written by Chris Griswold Tuesday, 1 March 2011 09:13

Why should a business owner use different LLC’s (or corporations) to help manage their risk and exposure?

First of all, legally speaking, it’s important to understand that LLC’s (or S-Corps or C-Corps, whichever one you use) are actually their own, separate, “legal persons.” This means that, just like you or me, the LLC (or corporation) can actually sue and/or be sued as a separate, legal entity (Note: the only difference between you being your own, legal person and the LLC being its own, legal person is that you, as a human being, in addition to being a separate, legal person, are also what’s called a “natural person” who is, medically speaking, an entity that is alive and breathing!). Second of all, as a business owner, it’s important to understand the incredible importance of having your various interests owned by various LLC’s (or corporations) because doing this, in and of itself, is actually a great way to perform the critical function of risk management. How does it work? Read below…

Using LLC’s To Manage Risk

For example, let’s say you’re a business owner who owns a plumbing company with 50 plumbers, 50 trucks and you own a 5 acre tract of land which contains your warehouse building and your administrative offices. You own all the land, the offices, the trucks and the warehouse building. Accordingly, you’d likely want to separate out your ownership of these various assets in the following manner:

A) You’d want to change the ownership of the trucks from your personal name (or from the one, single LLC or corporation that currently owns everything associated with your entire business) to a different, separate LLC – let’s call it “Truck, LLC.” By putting your equipment into Truck, LLC, you’ve separated it from the other assets you own (i.e., the 5 acre tract of land, your warehouse and your administrative offices) so that, if an accident was ever caused by one of your 50 trucks, the other assets won’t be exposed or made vulnerable to any claims arising from such truck accident.

B) You’d then do the same thing with your warehouse (i.e., Warehouse, LLC), your administrative offices (i.e., Administrative Office, LLC) and perhaps even certain pieces of plumbing related equipment (i.e., Related Equipment, LLC) which have their own unique, high liability risk factors such as: high voltage generators, tractors, backhoes, lift equipment, etc…).

This way, if any of these different categories of assets ever cause an accident (or are ever involved in an accident), all the other assets in the other LLCs will be neatly protected within their own separate, legal entity. Is this method completely fail safe? No. But it’s a great way to begin doing some risk management for your company. Otherwise, the line from that old Buster Poindexter rap song “Bust A Move” comes to mind where he says: “…got no money, got no car, got no woman, and there you are.”

What My Clients Are Saying

“Starting my own business presented many obstacles and uncertainties. I was fortunate and blessed to have my real estate broker recommend Chris Griswold as a resource for my lease reviews and negotiations. Chris addressed all my questions and concerns with unyielding patience and guidance and helped me secure a strong and favorable lease. Chris you are an exceptional resource and even better friend…. Thanks for all your help with this first location. I look forward to working with you on the next one.”
Chris Lucas / Owner / KoKo Fitclub / Edmond, Oklahoma

Working with Redlines

Last Updated on Thursday, 14 July 2011 04:03 Written by Chris Griswold Saturday, 1 January 2011 09:13

hope everyone had a great, warm holiday season.  Mine was filled with the laughter of little ones experiencing the joy and wonder of it all.  Brings to mind how lucky we are to live where we live, have what we have, and do what we do.  Not everyone is as lucky….  Today I want to discuss a simple topic – redlines.  Redlines are the comparison drafts (also known as “black lines”) which show the changes/deletions/modifications each party has made to the contractual document (be it a loan document, lease, purchase contract, cross access agreement or whatever).  I want to share with you all the importance of these documents.

Working With Redlines

Redlines show the history of the deal.  They show what each party attempted to add, change, or delete and, ultimately, what was finally agreed to and inked.  Accordingly, if you found yourself originally asking for an entire provision to be deleted (for example:  you’re a tenant and you asked that a provision in the lease relating to any mortgagee’s additional time period to cure any landlord’s default be totally deleted) and that provision is ultimately left in the lease, the redline showing that the provision was initially deleted but then ultimately left in the executed lease would be offered by landlord into evidence (in a subsequent, contested court case) to show that the provision was, in fact, a material, negotiated lease term which should be strictly enforced.

Another way that redlines might be later used as evidence is in the “we both agree to delete” scenario where both parties want to include something within the document (for example: a waiver of subrogation (“WOS”) provision) but can’t agree on the language so, ultimately, they just agree to delete out the entire WOS provision.  Down the road, when one party experiences property damage and seeks subrogation against the other, such other party’s efforts to defend itself by claiming WOS will fail when the claiming party produces the redline which shows both parties mutually agreed to delete the WOS provision.  This can be as scary as going to a restaurant with a 3 year old and they’re out of Mac N’ Cheese.

______________________________________________________________________________

“It has been a pleasure working with Mr. Griswold. He knows the commercial real estate business well and has been an integral element in our deal making process on some very key transactions.”
Kris Davis / Industrial and Investment Advisor / Grubb & Ellis | LevyBeffort / Oklahoma City, Oklahoma

Defining “Reasonable”

Last Updated on Thursday, 14 July 2011 04:03 Written by Chris Griswold Friday, 1 October 2010 09:12

I drove to Tulsa earlier this week and the leaves are starting to turn.  Gotta love Oklahoma.  Today I want to shed some light on a legal concept which you probably use every day but might not fully understand or appreciate.  It’s the term “reasonable” as it would normally appear within a purchase sale contract, a lease, a loan agreement or whichever document.  Read more below.

Defining “Reasonable”

At the end of the day, as with any legal concept, it’s all about how a court will interpret the term.  For example, let’s discuss how a court will interpret the phrase found within a lease which reads, “…in Landlord’s reasonable discretion….”  How will this interpretation occur?

The court will employ the age-old “reasonable person test.” What is this? This is where the court creates a fictitious, “reasonable landlord” who is basically identical to the actual landlord under the lease (obviously, in reality, there is no such person) and compares this fictitious, reasonable landlord’s discretion against the discretion employed by the actual landlord (which created the dispute in the first place).  It’s basically a “Monday morning quarterback” approach to determine whether the actual landlord acted “reasonably” in utilizing their discretion.  However, what factors will the court consider in creating this identical, fictitious, “reasonable landlord”?

Among other things, the court will look at the current, economic climate within which the actual landlord was operating (i.e., the post-2008 economic climate), the actual landlord’s financial position, the tenant’s financial position and creditworthiness, and both the actual landlord’s and tenant’s years of experience within the commercial marketplace.  The court might also look at the actual landlord’s and tenant’s prior dealings and course of conduct and perhaps even the tenant’s rent payment history under the lease.  Basically, the court will try to re-create the same factual environment that the actual landlord found itself within prior to utilizing its discretion.  Once the court has re-created this factual environment, the court’s fictitious, reasonable landlord’s discretion will be compared to that of the actual landlord so that, as nearly as possible, the court is comparing “apples to apples.”

______________________________________________________________________________

“It has been a pleasure working with Mr. Griswold. He knows the commercial real estate business well and has been an integral element in our deal making process on some very key transactions.”
Kris Davis /  Industrial Broker / Grubb & Ellis|LevyBeffort / Oklahoma City, Oklahoma