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One of the biggest risks for any small business owner is the possibility of facing a lawsuit or a debt collection from creditors. If you have invested a lot of your personal assets into your business, you may lose them if your business becomes insolvent or bankrupt. Therefore, it is important to take proactive steps to protect your business from creditors before any financial problems arise. Here are some strategies that you can consider to safeguard your business assets and your investment from creditors.

a. The time to protect your business investment from creditors is before any financial problems arise.

If you fail to protect your business assets before you borrow money, incur substantial debt, or encounter significant financial problems, you may be giving your business creditors a better chance of accessing your assets and challenging any future planning you have done.

b. Understand your exposure as a principal of the business.

As a shareholder of the business, your exposure is generally limited to the amount of your investment, including your shareholdings and any shareholder loans you make to the corporation. However, various situations may arise which impose additional liability upon you.

If you have given a personal guarantee to guarantee the debts and obligations of the business, creditors may be able to sue you and attach your personal assets (by way of garnishment or seizure) to cover the amount guaranteed.

As a director or officer of the company, you may also have additional personal liability for such things as unpaid employee salaries, uncollected or unremitted sales or other taxes, unremitted payroll deductions, and breach of contract.

c. Protect your personal assets.

Prior to signing a personal guarantee, engaging in a new business opportunity or agreeing to be a director or officer of a company, you should consider the following strategies:

• If you haven’t already done so, incorporate the business as a for-profit company or an LLC to separate your personal assets from your business’ liabilities, limiting creditor access to business assets only.
• Transfer your personal assets to your spouse or some other party (at fair market value).
• Invest your money in assets which are exempt from creditors’ claims.
• Set up an asset protection trust in a foreign jurisdiction.

d. Protect the company's bottom line.

There are similar steps you can take to protect the profits of your business:

1. Establish a holding company to hold the shares in the corporation. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.
   
   A holding company is a separate legal entity that owns shares in another company, usually the operating company that runs the business. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.

2. Set up a trust. Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   A trust is a legal arrangement that allows a person or an entity (the trustee) to hold and manage assets for the benefit of another person or group of persons (the beneficiaries). Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   All creditor proofing strategies require careful consideration of taxation issues so as to avoid income attribution problems or the unexpected triggering of capital or income gains. The above opportunities and strategies represent only a sample of what ought to be considered. Each circumstance will offer its own opportunities and restrictions on planning.You should consult with a professional accountant and a lawyer before implementing any of these strategies to ensure that they are suitable for your situation and comply with the relevant laws and regulations.

3. Make a secured shareholder loan to the business secured by business-owned assets as collateral. You will then have a priority creditor claim against those assets if the business defaults.

The ever-increasing reliance of content producers on artificial intelligence apps to generate content for online use begs the question of what legal obligations and liability risks arise from the use of that content.

The statutory and regulatory requirements governing the use of AI to generate online content varies widely by jurisdiction. While there is no universal set of laws, certain general legal principles apply across the spectrum.

1. Copyright and Intellectual Property Rights

When an AI bot generates content, the first questions that arise are: “Where did it obtain this content? Is it original or was it derived from an existing source? If it is derivative, who holds the copyright to that material? Who should be credited as the author?”

Is the “author” the AI bot, the human who programmed or trained it, the human who provided the input data, or the human who edited or published the output? Different jurisdictions may have different criteria for determining authorship and ownership of AI-generated works, and some may not recognize AI as a legal entity or a “creator” at all.

It is important to determine whether the AI is creating “original work” or if the content is derivative of existing copyrighted material. Additionally, the use of AI to replicate copyrighted content without permission may infringe on the copyright holder’s rights.

AI-generated content may fall under the doctrine of fair use or transformative use, which allows the use of copyrighted material for purposes such as criticism, comment, news reporting, teaching, scholarship, or research. However, this is not a clear-cut rule and depends on factors such as the purpose and character of the use, the nature of the original work, the amount and substantive nature of the portion used, and the effect of that use on the potential market.

2. Liability and Accountability

AI-generated content may also entail legal risks and responsibilities for the parties involved in its creation and distribution. For example, who is liable if the AI-generated content infringes on someone’s rights, causes harm, or violates laws or regulations? How can the AI bot be held accountable for its actions and decisions? How can the human users or beneficiaries of the AI-generated content ensure its quality, accuracy, and reliability?

3. Privacy and Data Protection

AI-generated content may involve the use of personal data, such as names, images, or biographical information, to create realistic or personalized content. This could violate any number of privacy and data protection laws that regulate how personal data can be collected, processed, and shared online.

If the AI uses personal data to generate content, it must comply with data protection laws such as the General Data Protection Regulation (GDPR) in the European Union, the California Consumer Privacy Act (CCPA), the Personal Information Protection and Electronic Documents Act (PIPEDA) of Canada, and other similar regulations. These laws require obtaining consent from individuals before processing their personal data and ensuring the protection of that data.

4. Transparency and Disclosure

Depending on the jurisdiction, there may be requirements to disclose to your site visitors that content has been generated by AI, especially in cases where the content might be mistaken for human-generated content. This is particularly relevant in advertising, news articles, and other media where trust and authenticity are important.

AI-generated content may pose ethical challenges, such as opportunities to mislead or deceive the audience, harm the reputation or dignity of individuals, or undermine the credibility or diversity of information sources. From an ethical standpoint, it is important for content developers to disclose the use of AI to generate content and provide clear and accurate information about the source, purpose, and quality of the content. It’s also important to avoid creating content that is harmful, offensive, or discriminatory.

5. Consumer Protection Laws

AI-generated content must not mislead consumers. This falls under broader consumer protection laws that prohibit deceptive practices. Content that is designed to deceive or mislead users may result in legal action and penalties.

6. Liability for Harmful Content

If AI-generated content is defamatory, discriminatory, or otherwise harmful, there may be legal consequences. The entity responsible for the AI may be held liable for the content it produces, depending on the legal framework governing speech and publication in the relevant jurisdiction.

7. Accessibility

Laws such as the Americans with Disabilities Act (ADA) in the United States may require that online content, including AI-generated content, be accessible to individuals with disabilities. This includes ensuring that content is compatible with screen readers and other assistive technologies.

8. Platform-Specific Rules

Online platforms (such as X, Facebook, Instagram, etc.) have their own terms of service and/or community guidelines that govern the use of AI to generate content. These rules may go beyond legal requirements and can result in content being removed or accounts being banned for non-compliance.

9. Export Controls and Sanctions

In some cases, AI technologies are subject to export control laws and sanctions, guidelines and requirements for disclosing AI generated content.

TAKEAWAYS

Full Disclosure. Always disclose which content is AI-generated and clearly label it as such. This can be done through disclaimers or specific mentions within the content that it was generated or assisted by AI.

Quality Assurance. Regardless of whether content is AI-generated or human-written, the focus should always be on producing high-quality, original content that provides value to the audience. 

Compliance with Laws and Regulations. The very nature of the worldwide web means that content on your website is accessible anywhere in the world. Be aware of any legal requirements or industry standards – both within your own jurisdiction and globally - that may apply to AI-generated content, and ensure that your content is compliant.

Image by Gerd Altmann from Pixabay

Image courtesy Pixabay.Com. Content partially researched using Microsoft Copilot AI.

What is an indemnity bond?

An indemnity bond (also called a surety bond or fidelity bond) is a form of insurance purchased by one party to a contract as a means of compensating a second party to the contract, should the first party fail to deliver on its promises or perform its obligations. The bond is guaranteed by a third party (usually a bank) which agrees to pay the second party if the first party defaults.

Under what circumstances would an indemnity bond be used?

There are many scenarios in which an indemnity bond might be required by one or more of the parties to a transaction. For instance, bid bonds are commonly used in situations where projects are offered through a bidding process.

Bid bonds ensure that the successful bidder follows through on the promises set out in its bid. Payment bonds are used extensively in construction projects to guarantee that the general contractor pays all of its subtrades and suppliers, to protect the project owner against exposure to lien claims.

An indemnity bond could be used to avoid double payment by a company redeeming its shares in the event of a lost share certificate, or to indemnify a freight carrier for delivery of a shipment of goods if the bill of lading is lost.

Is an indemnity bond the same as a personal guarantee?

No - these are two different types of obligations. A guarantee (or guaranty) is a promise to pay the indebtedness of a corporation or business if it becomes unable to meet its financial obligations, up to the full amount of the debt. An indemnity is a promise to protect the indemnified party against any losses it may suffer in connection with the transaction, without limit.

Do I have to get a lawyer to prepare the bond?

No, you can purchase a bond from any financial institution or insurance company. But you should review it with your lawyer so that he/she can explain exactly what the legal implications are.

Image by Dimitris Vetsikas from Pixabay

Elon Musk, CEO of Tesla, has made his position clear that if one of their self-driving cars has an accident, Tesla will not be liable and it will be up to the individual’s insurance unless the accident was the result of a design flaw. Volvo, Google and Mercedes Benz, on the other hand, have all stated that they would accept full responsibility. The real question is, how will insurance companies assess liability between the manufacturer and the driver, or will they hold both parties accountable?

Autonomous vehicles are loaded with safety features and crash avoidance systems, making self-driving vehicles much safer overall. But accidents will happen, no matter how safe the design. The question of who – or what – is liable will still depend on the individual factors that resulted in the accident. Regardless of what Elon Musk thinks, manufacturers and software designers will definitely be liable to some extent in many cases. Self-driving vehicles continue to have problems adapting to bad weather and fast-changing road conditions, and liability for accidents occurring in autonomous mode under these conditions would land squarely on the shoulders of the car company. But one big advantage the car companies have is this: testing has consistently shown computers to be safer drivers than humans. So it is logical to assume that under normal conditions autonomous vehicles will have fewer accidents than human-operated vehicles.

The UK Government’s draft vehicle technology bill suggests that the car manufacturers, not the individual behind the wheel, should be held liable. The bill also suggests that insurers offer policies for both fully autonomous and semi-autonomous operation of vehicles. Insurance coverage would be void if the driver makes unauthorized changes to the software or fails to keep the software updated.

Adrian Flux was the first UK insurer to provide driverless car insurance. The policy is dependent on a licensed driver being in the vehicle and able to take control at any time, and can be invalidated if the owner fails to properly maintain the vehicle, including timely downloading all updates to the software. The driver would be liable under UK law if he/she is under the influence of drugs or alcohol, is texting or otherwise distracted, or if the vehicle is exceeding posted speed limits.

Adrian Flux’ website also outlines the following interesting points:

The UK’s road’s minister, Andrew Jones recently outlined how the insurance industry will adapt to the introduction of driverless cars and the question of liability by saying, “…in the event of a serious collision in driverless mode, it would be the vehicle at fault, instead of the human driver.”

The National Highway Traffic Safety Administration in the US also, for example, considers Google’s autonomous driving software can be identified as the driver.  How this interpretation of liability will work with the State of California’s ruling requiring a fully licensed driver to be present in the car is still unclear. If there’s no steering wheel in the car, as Google is planning, why would a human occupant need a driving licence or car insurance?

That last paragraph raises the issue of who is considered the “driver”. If the car / software is held to be the “driver” under the law, then the auto maker must be held responsible to a large degree. A number of insurance industry analysts have said that this crosses over into product liability rather than personal insurance. If the technology malfunctions or if the car fails to respond as it was intended to, this is clearly a product liability claim and the auto maker’s insurance would and should pay for damages.

Here's an interesting to consider question: if the law requires a driver to hold a valid driver’s license to operate a vehicle, will it not then be necessary to institute a series of driving tests that the car must pass before it can drive itself?

The insurance industry will continue to adapt and adjust as the driverless car industry evolves and as the pattern begins to emerge over time as to the types of accidents occurring, the number of claims processed and the quantum of damages paid out. While improvements to safety systems have lowered the frequency and severity of certain types of collisions, they are also much more expensive to repair and replace. This results in higher payouts from insurance companies, which results in – you guessed it – higher insurance rates being passed on to the consumer. On the up side, though, the safer your vehicle is, the lower the rate you will get from most underwriters.

For the immediate future, it seems likely that most insurance policies will still require a licensed driver to be present in the vehicle and ready to take over in the event of an emergency. An underwriter may assess liability based on how much control the human operator had or might have had over the vehicle. If there is no means for the individual to take control, then the individual would bear no responsibility and the auto maker would be liable for the damages. Insurers and governments still have time to develop and implement laws, policies, rules and regulations before self-driving vehicles become a common sight on our streets and highways.

Image licensed by CreativeCommons.org

It's a nightmare to think about - a roofing contractor working on your house slips and falls off your roof, resulting in serious injuries. You have many sleepless nights wondering if he's going to sue you. What can you do to protect against such risks?