When developing an asset protection plan, you’ll often hear about inside liability and outside liability. They are different and it’s important to plan for both scenarios.
Inside Liability vs. Outside Liability
Inside liability refers to claims that emerge from within an asset or business entity. For example, if you have a rental property held in an LLC and somebody is hurt on the property, that liability occurs inside of the LLC. Or in other words, the creditor claim is limited to what is inside of the LLC. The creditor could not go after the business owner’s personal assets. (Another example would be if a client or customer were somehow “injured” and sues you.)
Outside liability is the opposite. If you own an LLC, outside liability emerges from events that occur outside of the LLC. An example is if you are deemed “at fault” for a car accident (it happens to the best of us). The victim of the accident then has a claim against you which can reach your personal assets.
Similar terms are inside/outside creditors and inside/outside debt. Inside creditors are people you owe money to from happenings inside the business entity. That money you owe is inside debt. Outside creditors are people you owe money to from happenings outside the business entity. That money is outside debt.
Colin Ley is a Seattle asset protection attorney. He is also the co-founder of LayRoots along with his wife, Shreya Ley.
