Lawsuits are a major concern for any business, but in construction -- where millions of dollars of real estate can be encumbered by liens and judgments -- they can be downright crippling.
Litigants and attorneys know that if they can cloud a title with liens or judgments (even temporarily), they can often force a settlement on favorable terms by bringing project financing to a screeching halt.
One way to provide an added level of protection against frivolous litigation is to form separate corporations -- one to own the property in each individual project and another to operate as a building contractor. This allows you to separate the entities owning the primary assets from the operating building corporation that is most likely to accrue liabilities.
The operational corporation can be maintained permanently, preserving licenses, credit accounts, and payroll from one project to the next, while a fresh entity can be established to hold title to the property in each new development.
This protection is far from perfect. Creditors of the building company can still sue the landholding corporation, though in practice some may not even notice the divided structure. Additionally, if the books and operations of the companies are kept separately, there is some chance that the landholding corporation would escape liability even if the building company does not.
While far from a perfect solution, this strategy does provide some low-cost protection against frivolous and damaging litigation.
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