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QUESTION: Mr. Smith, many years ago I considered opening a real estate sales business. Others advised me to go to an attorney and set up some type of corporation in order to protect my personal assets from any future liability claims. The business never happened, but the corporate veil idea has bothered me ever since. I am wondering about the ethics of such a plan which is designed to possibly deprive a person harmed by a business of the ability to be made whole if the business itself has insufficient assets to do that. The second part of my question is whether at least some states require such corporations to maintain insurance that could assist an injured party in place of the protected assets of the owner as an individual. This seems to be the only way to protect customers who have been injured in some way due to the corporation's actions or omissions. Can you clarify these issues?

ANSWER: Hello Frank,

Before I respond further to your question, I must make clear that I do not represent you, and cannot give you individual particularized legal advice. No attorney client relationship is created by this email. For legal advice, you should hire your own attorney, and follow their advice. My role with AllExperts is limited to providing general information and suggestions for educational or general knowledge purposes. Before you take any action, consult with your own attorney.

The gist of your question may be more effectively pondered in the philosophy department, rather than a subject of my opinion.  

To my knowledge, in my state businesses are not required to have liability insurance.  Certain industries may be subject to requirements, and rules vary by state beyond my knowledge.  Business owners may be prudent to protect themselves with various types of coverage.

The historical purpose of forming a business entity is to protect the shareholders from liability of incurred by the enterprise while generating a profit.  While its great for a business to serve a public good, and probably great advertising to do so, it is not the purpose of a business to protect the public.

In my experience in civil litigation, I find that the government is not disposed to make sure every debt is paid.  I've encountered lots of folks with outstanding judgments against natural persons and business entities who are unable to collect for a variety of reasons.  Consider for example the availability and function of bankruptcy protection.

While I can join you in imagining a society that requires everybody to carry liability insurance in case they get sued over business transactions, I'm not familiar with any reality that matches that.  Conversely, legislatures have made different decisions in other circumstances, such as the requirement to have car insurance.  Arguably, operating a motor vehicle is more dangerous than conducting business, but that simply returns us to the philosophy department.

I hope this helps, good luck to you.

Morgan Smith
SMITH & RAVER LLP
Minneapolis, Minnesota
http://smith-and-raver-llp.biz
Conciliation Court * Civil Litigation * Forfeitures * Construction * Family Law

---------- FOLLOW-UP ----------

QUESTION: Mr. Smith, I was and am well aware that you do not represent me and that your answering this question out of generosity does not indicate that you
are providing individual legal advice.

I know that ethics is taught in law school, so I am wondering if a question like mine ever comes up for class discussion, and if so, how is the practice of forming a business entity to avoid liability explained to students. These people may be giving such advice some day.

Please understand that I am not being argumentative. I am just trying to rectify in my own mind this apparent discrepancy. Or is it a discrepancy?

Answer
Hello again Frank,

The same rules of my initial response apply to this follow up.  I would not describe you as argumentative; rather, I'd choose curious, imaginative and philosophical.

The legal ethics course I took in law school was about the Minnesota Rules of Professional Conduct and the Minnesota Rules on Lawyers Professional Responsibility.  http://lprb.mncourts.gov/rules/Pages/default.aspx

The purpose, mechanics and effect of establishing a business entity, and piercing the corporate veil issues were taught in business law.

I do not recall any discussion in law school about a person (natural or business) carrying liability insurance for the purpose of protecting others.  In my practice, my focus has been on advising and assisting clients in forming business entities to protect themselves as business owners from liability to others.

One of the ethical theories established in the rules is an attorney's duty of loyalty to the client.  While its nice to be a good citizen and keep the public well-being in mind in our private and professional lives, it is my conclusion that it is a lawyer's function to serve and advise a client about their best interests rather than function as a public advocate.  So in setting up a business, or representing a business entity, it is my practice to concentrate on the client's protection from liability from a potential adversary.  It is not within an attorney's function to fret over a potential adversary's ability to collect on a hypothetical judgment against the client.  I trust this rectifies the discrepancy you perceive.

I hope this helps, good luck to you.

Morgan Smith
SMITH & RAVER LLP
Minneapolis, Minnesota
http://smith-and-raver-llp.biz
Conciliation Court * Civil Litigation * Forfeitures * Construction * Family Law

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Morgan Smith

Expertise

Civil litigation (contract claims, landlord-tenant actions, forfeiture suits, residential construction defect matters), Family law (divorce, custody modifications, child support modifications, and pre-nuptial agreement), new business start-ups, civil forfeiture, asset forfeiture. Please do not submit your question as Private. It is my policy not to answer Private questions from members of the public here on AllExperts; I reserve that function to my private clients. Although AllExperts permits me to change your questions from Private to Public, it is my policy not to do that. I encourage you to resubmit your question as a public question. Your public question has the potential to help others with similar concerns. I suggest that you use a pretend name and otherwise alter sensitive facts that make you inclined to treat your question as Private, and submit your question to me Publicly.

Experience

I've been practicing law in the State of Minnesota since 1995. I've worked in skyscraper firms, and now my own small firm in Minneapolis. Past answers from my earlier participation on AllExperts is posted at: http://en.allexperts.com/q/Civil-Commercial-Litigation-911/indexExp_80217.htm

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AllExperts, Yahoo Answers, http://smith-and-raver-llp.biz/News.html

Education/Credentials
J.D. William Mitchell College of Law, St Paul, MN

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