Running a business is not easy. Several factors contribute to the successful operation of a firm and its profitability. Risk management is one of them. Business management is frequently laden with risks, which you, as the owner, must manage. Moreover, you must ensure the protection of both your business and personal assets in case of any legal disputes. That is why business owners need to have an asset protection plan.
An asset-protection plan aims to avoid or considerably decrease risk by insuring your personal property against creditor claims. A great place to start is to choose a business structure that gives your business a separate legal identity, like a corporation or trust. Therefore, you must choose your business structure carefully when establishing a business. Here are some ideas on how to protect your personal assets as a business owner.
1. Choose the Right Business Structure
Forming a company entity that is separate from you is arguably the most crucial step you can take to safeguard your possessions. You can establish various company structures, each with unique benefits and drawbacks.
Most business owners start by forming a sole proprietorship. Some people choose these business models because they provide them with the flexibility and freedom to be their own bosses. It is also relatively simple to set up compared to other business structures. However, the main issue is the lack of a separate legal identity. This means that the business and the owner are treated as one entity in legal proceedings. So, if any legal battles arise, then the sole proprietors’ personal assets could be used to settle any debts. Therefore, a sole proprietorship does not provide any form of asset protection.
Instead, you could prefer to establish a corporation, limited liability company (LLC), or a limited partnership (LP). These structures are recognized as separate legal entities that can incur their own obligations and loans and be cited as juristic persons. Note that different states and regions may have different requirements to set up an LLC or any other business structure.
However, keep in mind that if your company incorporates, your personal assets could be taken in a lawsuit. In contrast, if you or another owner is sued, your ownership interests in an LLC or LP cannot be taken. Therefore, you may want to consider switching your company from being a corporation to either an LLC or LP if it currently is one. Not all risks are avoidable by forming a separate corporate entity. However, having a separate legal entity goes a long way in providing personal asset protection.
2. Consider Additional Asset Protection
Additionally, you might wish to create an LLC to hold personal assets only. This type of LLC prevents property and sizable investment accounts from confiscation in court proceedings. However, for every kind of asset, you will need a different LLC. For instance, you could establish two LLCs for each piece of real estate you own and another LLC for your assets in stocks. It would be best not to pursue this option on your own. Instead, consult a business attorney who can review your options.
3. Get Liability Insurance
It is crucial to have comprehensive liability insurance. This will be your first line of defense if you face legal action. Look for insurance that covers the typical hazards that your business experiences. For example, it would be prudent to get truck insurance if you run a trucking business. However, it would be wise to have coverage that shields it against defamation or copyright claims if you are in the marketing industry. Discuss the type of policy and the appropriate level of coverage for your business with a licensed insurance agent.
However, while liability insurance can be useful in some cases, remember that it will not shield you from everything. The insurance company may be unable to pay the whole settlement amount, depending on your coverage. It is also possible that your specific coverage will not be able to cover specific claims, such as cyberbullying.
4. Lower Your Cash Reserves
Ideally, your company should only hold the amount of cash necessary to cover its day-to-day activities in the bank. You want to keep as little money as possible. This is because if your company loses a court battle, it is highly likely that the winner will pursue the cash.
In that case, removing the money from your company bank account may be impossible since the lawsuit is pending. Transferring that money would be considered fraudulent. As a result, you must protect that money long before you face any legal action. All non-essential funds should ideally be kept in an LLC held by you, not the business. In this manner, it will shield that cash from your company’s creditors. If ever you need money from that LLC, you can always give yourself a loan from that LLC.
Conclusion
While none of the above solutions guarantee complete protection, having an asset protection plan is preferable to having none at all. If you are a careful businessperson, these strategies should give significant personal asset protection in most circumstances. The simplest way to protect your personal assets as a business owner is to choose a business structure with a separate legal identity. From there, you can explore other strategies, even those not mentioned above. Consult with your legal or financial advisor first before making any moves.
