Inside liability refers to liability as a result of business operations—such as disgruntled customers, vendors or employees. Perhaps you own a construction company and someone becomes injured on the job, or you own an plumbing business and one of your employees caused an accident in the company van.
If the business entity is properly structured and maintained (note that this is an important step that many small business owners neglect), then the business entity will shield the business owners personal assets and home from lawsuits resulting from inside liability, with the exception of certain special forms of liability such as malpractice liability. This means that if the business is sued, typically only the business assets will be at risk to the lawsuit.
Outside liability is liability resulting from your personal life. Perhaps you cause a severe car accident, someone is injured on your property, or some other catastrophe. The person bringing the lawsuit can’t directly take business assets, BUT they can try to claim your ownership in the business—i.e., your stock or ownership interest in the corporation or limited liability company.
Thus, many business owners or professionals that are at risk of malpractice exposure, such as doctors, dentists, lawyers and accountants, may want to undertake asset protection planning for their personal assets to create further separation between their personal assets and business assets. Similarly, it can be prudent to separate higher risk assets, such as automobiles and rental real estate, from other assets and property.
In our office, we call this “bubbles and boxes.” The bubbles representing business entities and the boxes representing trusts. Depending on the asset mix and risks, we may recommend some combination of one or more bubbles and boxes to achieve maximum separation of assets.