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—For our purpose here, it makes no difference if your company was exposed to other risks through medical, legal or any other services or products.—
Here's a business owner's nightmare scenario. Let's say that your company uses hazardous materials in its daily operations. Let's also say that despite doing everything right to protect your workers, an employee finds a complaint and gets a hold of an attorney.
But this happens to be more than just an attorney.
This guy is good... I mean, bad; depending on whether he's on your side or is playing against you. This attorney has an astute modus operandi that diverges from the norm and which is quite effective. This guy sues you and your company.
But he has no interest in winning the court-battle. No! Judicial Harassment is more like torture. Pain is the main factor driving results. The more intense and personal the pain he can exert on you, the better his chances at getting what he wants.
After proving that there was damage to his client, he will ask that the court safeguard the money that could be used to pay his client's compensation. He will ask that your accounts be frozen. He knows that most small business owners pay personal expenses through their company in an attempting to reduce tax liabilities. Many businesses follow the advice of their CPA's. They create pass-through companies and show no income at the end of the year.
It is therefore easy for this lawyer to show that you have previously taken money out of the company for non-business related expenses. He will next argue that you will certainly be tempted to doing it again; thus putting at risk his ability to properly gain indemnity for his client.
Depending on the case, this hassle will even disrupt normal cash operations in the business. Thus, the risk of crippling the company is very real. Remember that his chances of winning increase as he cranks up the pain.
The net result is always the same. You won't be able to pay your mortgage, your cars or a number of important expenses. Under the circumstances, you won't be able to get an income increase to compensate for your now strained cash position. If you did, the judge would probably respond with strong punitive measures; never a good thing.
In a nutshell, you could easily lose your property; which is the essential part of the Harassment. Just think of the fact that it always takes a long time for a case to go through the courts. How long could you hold your breath underwater? It may be over a year before you can prove your innocence to the judge.
Inevitably, you will probably give up and settle. He wins!
Yes, you and every small business are just one bad-attorney away from a scenario like this. Perhaps more depressing is the fact that more successful companies make better targets as the bounty collected by the pirates could be much greater. And for those who pay the price once, the chances for a repeat are greater yet, once the word spreads. Companies may go for decades without experiencing a single frivolous law suit. But this is a case where past experience does not offer a certain view at what the future will bring. Moreover, I find questioning the probabilities that you could experience Judicial Harassment to be misguided.
If a solution was costlier that the problem, I could see why ignore the issue. But since the cure is simple, valuable to you and your family, and may be used for other purposes, the real question should be why not?
You see, this is no ordinary protection. It isn't like liability or car insurance, which expire worthless every year and which serve no other purpose.
Section 7702 of the IRS code allows for the creation of an impenetrable fund where money is protected from dirty attorneys and other predators. They just can't claw their way into the money. These funds are completely under your control and could be structured to have a high degree of liquidity for these or many other emergencies. They can be structured to benefit from tax deferred growth. Tax free access to the money is even possible when well designed. And perhaps the best part is that in case that you are never under threat of Judicial Harassment, the money continues to grow under your control and available for your retirement or gifting needs down the line. Despite mentioning it before, it is worth writing it again: Unlike derivative options or other types of hedging mechanisms, which lose value every day, these solutions continue to grow their worth over time.
Intrigued? Ask your professional advisers about how to use 7702 for this and other business risks.