Going into business for yourself is a risky endeavor. From investing in goods and services, to hiring employees, to simply carrying out the daily administrative tasks, each step can be fraught with risks and have the potential for exposing a business to litigation. For this reason, many entrepreneurs employ asset-protection strategies to minimize risk and protect assets from creditors’ claims and litigation.
Here are a few asset-protection strategies you can use to help you retain and sustain the value of your business property and accounts:
1. 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 protect a business owner’s personal assets. On the other hand, business structures like the limited partnership, limited liability company, and corporation shield the individual business owners from being held personally liable for the company’s debts or other liabilities. A properly established and maintained limited liability business exposes only the assets of the business to creditors, and not the business owner’s personal property. Therefore, 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.
2. 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 that separation.
3. 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.
4. 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.
5. 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 court may view it with suspicion as a tool to avoid liability.
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The protection and preservation of the wealth you create as an 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. Call our office to schedule an appointment today (651-738-3433).