Going into business for yourself is a risky endeavor. From investing in goods and services and hiring employees to simply carrying out the daily tasks related to your business, each step is fraught with risks. This is especially true given the litigious nature of our society. Unfortunately, many business owners face collection when the business closes due to financial issues. Business bankruptcy often causes collection against the owner of the business.
As a result, many business owners and entrepreneurs employ asset protection strategies. Asset protection is a form of strategic planning aimed at minimizing risk and protecting assets from creditors’ claims and litigation.
Careful asset protection can help you retain and sustain the value of the property and accounts you own. As an entrepreneur, here are a few strategies you can use to protect your assets:
- Separate your personal assets from your business assets by establishing a limited liability business entity. The default structure for an individual starting a business is the sole proprietorship; the default structure for multiple people starting a business together is a partnership. These entities, though simple to create, do not legally protect the business owners’ personal assets. However, business structures like the limited partnership, limited liability company, and the corporation provide limited liability. This means that the owners of the business are not personally liable for the company’s debts or other liabilities—for example, if a judgment is obtained in a lawsuit against the business. A properly established and maintained limited liability business structure restricts liability to assets belonging only to the business. Creating a separate legal entity is one of the first steps every entrepreneur should take to protect personal assets. Subsequent practices like opening a separate business account, complying with legal requirements such as paying state filing fees, and not commingling personal funds with business funds further establish the legal separation between personal assets and business assets.
- Keep multiple business ventures separate. Many entrepreneurs are serial business owners who wear many different hats and run a variety of businesses. In these cases, another way to protect your business assets is to ensure that you keep the assets of each business separate. This requires setting up different legal entities for each of your businesses, ensuring that they incur separate liabilities and debts. Failure to legally separate your diverse endeavors will expose all of your businesses to each business’s creditors if litigation arises and one of your businesses is found liable. As a result, it is important to separate these business interests as soon as possible and to ensure that the documentation, banking, accounting, and record-keeping for each business reflect the separation.
- Obtain sufficient business and personal insurance. Problems and accidents are inevitable, and when they occur, having insurance in place helps insulate you and your business from paying for any losses directly. Various types of insurance are available to you as an entrepreneur; the types you should obtain depend on the type of business you conduct and your unique preferences. Once you have obtained insurance, diligently review your insurance policies to ensure that your insurance coverage remains adequate to cover the value of your assets.
- Avoid personal guarantees. As an entrepreneur, you may encounter vendors who request personal guarantees. A personal guarantee is an agreement that you will be held personally responsible for the debt your business incurs in the event the business is unable to satisfy it. If you are asked to sign a personal guarantee, consider negotiating a higher payment to the vendor to eliminate the need for the personal guarantee. Despite the short-term discomfort that may be involved in such negotiations, they can provide long-term benefits to business owners.
- Transfer some of your assets to a trust. A trust is a legal tool that allows a third party, the trustee, to hold assets for the benefit of another, the beneficiary. There are various types of trusts available to individuals. For business owners, one of the preferred types is an irrevocable trust because the business owner relinquishes ownership and control of the business assets, and therefore, the assets are not subject to the risks of loss associated with a revocable trust. A revocable living trust, on the other hand, does not provide protection to business owners against personal liability for the business’s debts or lawsuits because the business owner, who is typically also the trustee, can change the terms of the trust at any time before death and is still treated as the owner of the property held in the trust. However, a revocable living trust can protect from creditors assets that pass to your spouse and children after your death. Entrepreneurs interested in asset protection should strongly consider setting up an irrevocable trust early in their business development. If a trust is created after litigation arises, the trust may be viewed with suspicion by a court as a tool of liability avoidance.
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The protection and preservation of the wealth you create as a business owner or entrepreneur does not just happen on its own. It involves strategic planning and intentional execution. Our team of experienced attorneys is available to help you assess how best to reduce your risk and maximize asset protection for yourself and your business. Already experiencing business debt issues? Call for a free case review today.