Being a successful business owner entails exposing yourself to many different risks, which increase in number as your business grows. When that happens, you need to keep your personal assets safe.
Personal asset-protection planning mitigates or eliminates business risks by protecting personal assets from lawsuits, creditors, and other potential threats. It’s too late to implement these measures in place after a claim or lawsuit has been filed, so do so before opening your doors. If you take action to protect your assets following a claim or lawsuit, you may be accused of fraud. So, act now while you still have options to protect your business and its assets.
Depending on your business and personal assets, personal asset protection strategies should include the following measures:
Set Up A Proper Entity Structure
Choosing a business structure that limits personal liability is the first step in protecting personal assets against business debts and lawsuits. And can be safeguarded by forming a corporation, an S corporation, a C corporation, or a limited liability company (LLC).
To collect on a debt or court judgment, creditors can go after these corporations, however, they can usually only seize commercial assets. But not so for sole proprietorships and general partnerships. There’s no wall between commercial debts and personal ones. If these businesses have debts, their owners could be personally liable for paying them.
If you think LLC may be a good fit for your business, there are steps you need to do. Remember that forms and procedures for establishing a limited liability company (LLC) vary from one state to the other. California LLC procedure is different from Nevada’s.
Always Follow Proper Procedures In Business
Choosing the right entity structure for conducting business is a crucial first step, but if certain procedures are ignored, the entity may be deemed ineligible for liability protection, leaving the personal assets of its owners vulnerable to claims made against the company.
When a corporation is formed, it falls within the authority of the state’s incorporation laws. Forming a corporation and enjoying the accompanying personal asset protections requires you to meet a long list of initial and ongoing internal and external corporate compliance obligations. To comply with applicable law, corporations must take several formal steps, such as electing a board of directors, drafting and adopting bylaws, holding shareholder and director meetings, filing annual reports, making financial disclosures, and so on.
If you fail to fulfil your compliance obligations, the state may revoke your company’s good standing certificate. This comes at a price. Your company could be suspended or dissolved and fined. Personal valuables may be at risk. If the state no longer recognizes your corporation, you won’t be protected from lawsuits.
If a limited liability company (LLC) is sued or declares bankruptcy, its creditors and lawyers will typically go after the company’s assets rather than the owners’ individual possessions. However, owners may be held liable for damages in their individual capacities under specific conditions. Their personal assets could be at risk if they have personally guaranteed a business loan, put up personal property as collateral for a loan, or committed fraud.
Unintentionally jeopardizing the personal liability protection provided by a corporation or limited liability company can occur when the owner, shareholder, or member fails to keep personal and corporate finances separate. Such action ‘pierces the corporate veil.’
Place Your Assets In A Trust
It’s possible to operate a business through a trust. The trustee of a trust can either be an individual or a legal entity. In accordance with the terms of the trust deed, the trustee manages the trust’s assets and distributes profit to the trust’s beneficiaries.
This process can be daunting, though. So, you’ll need a lawyer and/or accountant. A trust protects corporate directors. If set up and used properly, you can put your home and other assets into a trust, making you asset-free.
However, your creditors still may be able to get their hands on some of your property. It’s possible to ‘claw back’ trust assets and reclaim them if the trust is not established properly. If this happens, the debts will be settled by the sale of these assets to the creditors. If you move assets to a trust too close to financial problems or bankruptcy, such assets may be reclaimed. You should create trust before you need its protection.
Have Proper Contracts In Place
When business owners don’t take the time to create comprehensive, legally binding contracts with their customers and clients, they leave themselves vulnerable to lawsuits and other unwanted consequences.
Regardless of whether you decide to handle the other issues brought up above, it is essential to consult with knowledgeable legal experts to verify that contracts taken into by the business fit these standards.
If you want to safeguard your assets from being taken from you, you need to take action long before any claims or liabilities are made. The aforementioned measures are just a few of the many that can be taken to safeguard personal assets when conducting business.
Business attorneys are the people to go to if you need help keeping your investments safe.