When you own a business or have an interest in one, it's important to understand legal concepts like a statute of limitations. Knowing better how a statute of limitations works can help you better navigate your company's financials.
Definition
What is a statute of limitations?
A statute of limitations is a time limit on how long a criminal or civil charge can be pursued; it can vary widely based on the jurisdiction. Some states allow very generous windows for prosecuting such trespasses; in others, the opportunity is relatively fleeting. Serious crimes, like murder, often have no statute of limitations.
For business owners, it's also important to know that consumer debt is subject to a statute of limitations. Although this falls under civil law, knowing there's a limit on how long you can pursue money that's owed to you (even if the customer agreed to the terms in writing) can change your strategy as a business owner.
How it works
How does a statute of limitations work?
Statutes of limitations are very simple. You have a specified amount of time from the date of the infraction to file a suit. If you're outside that window, even by a day, it's too bad, and you're just completely out of luck.
For example, if a customer owed you for unpaid inventory and the statute of limitations in your state was three years, you could file in civil court to collect that money between the moment the debt was considered overdue and three years from that date. So if your contract specified that collections would start at 90 days past due, and they received their goods on March 1, 2023, and failed to pay by May 30, 2023, you'd have until May 30, 2026, to file your grievance. If you filed on May 31, 2026, you'd be out of luck.
Pros and cons
Arguments for and against the statute of limitations
A statute of limitations can be more consumer- or business-oriented, depending on the time period for your area. It's important to have a statute of limitations because it allows you to file your loss for unpaid inventory or the company that wasn't able to pay its bill to know it can no longer be pursued as it tries to right its own ship.
However, it's important that statutes of limitations be a fair length because it can take time to discover problems like medical malpractice. In many states, these are limited to two years, but it may take a while to discover a new hip implant isn't just aching because you're getting used to it but that it was actually installed improperly and the hardware has worked loose.
Because of situations like this, one of the most important ongoing struggles with statutes of limitations is whether they will favor the consumer (generally allowing a longer statute of limitations, except in the case of debt collection) or the business.
Related investing topics
Why it matters
Why statute of limitations matters to investors
For investors, especially if you invest in potentially high-risk sectors like biotechnology, understanding the statute of limitations and how it applies to your portfolio is vital. If your biotech company, for example, were to invent a product that caused a lot of issues and resulted in numerous lawsuits, that could seriously hurt the company's bottom line, as well as its reputation (not to mention all those customers).
But this isn't the only way that a statute of limitations can apply to investors. Some investors invest in companies that handle consumer debt in some way, from mortgage REITs to debt collection agencies. When it comes to these companies, the statute of limitations on debt collection figures heavily into their business model.
So, if you know your companies and how they work, as well as how and when a statute of limitations would apply, you can have a better idea of your risk as an investor.
Few people anticipated the Great Recession, for example, and the associated collapse of mortgage-backed securities, but the risk always existed. Knowing how or when investors in these instruments would be made whole required some understanding of the applicable statute of limitations.
