Americans file 15 million lawsuits each year. Not every lawsuit has merit. Not every lawsuit has issues that are clearly defined in black and white. But there are many hungry lawyers eager to represent a plaintiff on a contingency-fee basis, which means you have to defend yourself.

One reason entrepreneurs are so vulnerable is because they wear so many hats. As the owner of a commercial property, you could have a tenant who claims an injury and decides to sue the landlord. As an employer, you can be sued by your employee for harassment, fraud, unlawful termination, age or sex bias, or some other perceived injury. As a homeowner, you can be sued for an injury that occurs on your premises. As a parent, you can be sued if your child causes injury or damage while driving a car you own, and so on.

Win or lose, you’ve lost. So, what can you do to avoid or mitigate such lawsuits? First, let’s recognize that there is no such thing as being completely “bullet proof.” Asset protection involves shades of gray. The greater the distance your assets are from a potential creditor, the greater the likelihood you will be able to settle your lawsuit at a zero cost or substantial discount.

Any solid asset protection plan should accomplish these three goals:

1. Isolate and compartmentalize risky assets or activities through legal structures which insulate the owner’s other assets;
2. Position part of an owner’s net worth in investments that enjoy special protection under the law (e.g., a homestead, qualified retirement plans or cash value life insurance);
3. Build obstacles that make it more difficult for creditors to reach assets.

Other than their operating business, the largest asset franchise owners hold is typically their real estate. Most of our Dunkin’ Donuts clients expect to sell their operations someday, but retain their real estate holdings. They recognize that some of their best investment opportunities are the triple net leases under the operating business.

In order to insulate and isolate your real estate holdings, we typically use a real estate holding company (RHC), because it serves a variety of tax and non-tax purposes. The RHC will permit you to own multiple properties under one corporate umbrella, but will permit you to segregate each asset for asset protection purposes. Typically, the RHC will be structured as a limited liability company (LLC) or a limited partnership (LP) and will own multiple single member limited liability companies (SMLLC) that own individual properties. Although corporations are often used as holding companies, entities treated as partnerships or proprietorships can have preferable income tax considerations.

Generally, money or property that is held in a single member LLC cannot be taken by creditors to pay off the personal debts or liabilities of the LLC’s owners. Even though creditors cannot collect directly from an LLC for an owner’s personal debts, there are other ways creditors might try to go after the LLC for the owner’s personal debt. These include:

• Obtaining a charging order which requires the LLC pay the creditor all the money distributed to the debtor-owner;
• Foreclosing on the debtor-owner’s LLC ownership interest; or
• Getting a court to order the LLC to be dissolved and all its assets sold.

Our recommendation is that each Dunkin’ Donuts franchisee owns his or her property through a SMLLC, which is owned by the RHC. The RHC will be a multi-member LLC or family limited partnership (see diagram).

While there are shades of gray involved in how a lawsuit is filed, argued, settled or tried, certain legal structures are simple black and white. Proper holding structures, like the ones discussed here, are the best type of asset protection you can own—and the sooner you create the right structure for your assets, the better protected you will be against claims from a future creditor.

Seth E. Ellis is a Director with the Florida-based law firm Tripp Scott, P.A. His practice focuses on asset protection and estate planning.