Regardless
of the industry you are in, the reality of being a business owner is that you
open yourself up to a number of unique risks that most people don’t have to
worry about—and the more successful your business is, the more risks you face.
Unfortunately,
most business owners aren’t fully aware of all the potential risks that can
affect their company or the options they have available to protect their
personal assets from the risks of doing business. This is where asset
protection planning comes in.
Asset
protection planning is designed to reduce or eliminate the risks of being in
business by shielding your business and personal assets from lawsuits,
creditors, and other potential threats to the fullest extent legally possible.
And it’s absolutely crucial to have your asset protection strategies in place
from the moment you open your doors, because once a claim or lawsuit is filed,
it’s too late.
In
fact, if you take certain actions to protect your assets after a claim or
lawsuit has been filed, you could be charged with fraud. With this in mind, the
time to take action is now, while there is nothing to worry about and the full
range of options to protect your assets are still available to you.
While
the specific protections you require will largely depend on the specifics of
your business and your personal assets, the following four vehicles form the
foundation of most business owners’ asset-protection planning.
01 - Business Entities
One
of the most fundamental asset protection strategies is setting up the proper
entity structure for your business from the start. Without the correct entity
in place, your personal assets would be at risk if your business ever gets into
debt that it cannot pay, or is hit with a lawsuit.
For
example, if your company is structured as a sole proprietorship or general
partnership and you go out of business, creditors could come after your
personal assets to pay off your business debts. Similarly, if your sole
proprietorship or general partnership is hit with a lawsuit, your personal
assets could be seized to satisfy a judgment.
By
structuring your business as a limited liability company (LLC) or corporation,
you can shield your personal assets from liabilities incurred by your business.
These structures establish your company as a separate legal entity that’s
distinct from you as an individual, which prevents you from being personally
liable for the company’s debts or legal liabilities.
As
long as you properly maintain your entity’s administrative formalities and keep
your business and personal assets separate, both LLCs and corporations
effectively create a barrier between you and the activities of your business.
Creditors, clients, and other potentially litigious entities can go after your
business assets, but not your personal assets.
That
said, you can be held personally liable in certain situations, such as if your
entity isn’t maintained properly or you mistakenly commingle your personal and
business finances. In that case, a court will hold you personally liable for
the debts and liabilities of your business. When this happens, it’s known as
“piercing the corporate veil.”
This
is exactly why it’s so important to work with a lawyer to set up and maintain
your business entity, and not try to handle this on your own. The consequences
of not maintaining your business entity are just too high, and by the time you
are facing those consequences, it’s too late to do anything about it.
We
offer you a number of legal and financial systems that make keeping up with
your entity’s administrative and compliance formalities a snap. Meet with us to find out what entity structure is best
suited for your business and how we can ensure you have the maximum liability
protection possible.
02 - Business Insurance
While
setting up a separate legal entity can safeguard your personal assets from your
company’s liabilities, an entity will not protect the assets of your
business—that’s what business insurance is designed to cover. And since a
catastrophic event or lawsuit can wipe out your company, it’s vital to have the
proper insurance coverage in place from the start of your business.
The
type and amount of coverage your company needs will largely depend on your
particular company and its assets. However, most businesses can benefit from
the following forms of insurance: general liability insurance, professional
liability insurance, property insurance, cyber insurance, and employment
practices insurance. Additionally, you should also consider investing in
umbrella insurance, which would cover you for any damages in excess of your
other individual policies.
Finally,
if you are considering letting insurance wait, or not making insurance a
priority, remember this: anyone can sue anyone at any time for anything. You
don’t even have to have done anything wrong to get sued. Yet whether you are in
the wrong or in the right, if you do get sued, you’ll need to pay big money to
hire a lawyer to defend you. With the right insurance in place, your insurance
will cover paying that lawyer to defend you—and that could be the most
important reason to get insurance.
Before
you sit down with an insurance agent, meet with us. We’ll look at
your business assets and underlying risks to identify the optimal levels of
coverage you should have in place.
03 - Legal Agreements
Legal
agreements are very likely the most important part of your asset protection
plan. Legal agreements protect your company’s most essential elements: your
personal liability, personal and professional relationships, intellectual
property, and trade secrets, to name just a few.
In
addition, legal agreements govern the rights and responsibilities of every
party you do business with, from clients and vendors to employees and
contractors. Given the importance of such documents, you should never rely on
generic legal forms you find online when creating your business agreements.
Instead, reach out to us to support you
in creating, reviewing, and updating your company’s legal documents to ensure
you have the most robust legal protections in place at all times.
When
creating legal agreements, remember this: the most important part of your legal
agreements are the process by which you reach an agreement as well as the
clarity of the documented terms, so if there is a later dispute, you’ve already
established how you will handle and resolve conflict. Template form documents,
or “cheap legal” in the form of a lawyer who really doesn’t understand the
relational aspects of your business, simply won’t cut it. You want to work with
a relational lawyer who understands how to keep businesses out of court and
conflict.
If
you are going it alone with legal agreements, be sure to enter into all
agreements in the name of your business entity, not in your personal name. And
whenever possible, be sure that your legal agreements include provisions
requiring conflict resolution through mediation and arbitration before
litigation, which should always be a last resort.
Furthermore,
in certain cases, the terms of your business agreements can be designed to
limit the level of liability and potential damages your business would face
should a dispute arise. However, when it comes to limiting liability through
legal agreements, state law varies widely, so your agreements should be
prepared and reviewed by a business attorney licensed in our state.
04 - Trusts
Business
entities protect your personal assets from the activities of your business, but
by using a specially designed irrevocable trust, you can protect your business
from your personal activities. Such trusts are set up so your business is owned
by the trust, not you, and since you can’t lose what you don’t own, your
company and its assets can’t be reached by your creditors or any lawsuits
against you due to your personal activities, such as a serious accident,
bankruptcy, or divorce.
To
be clear, asset protection trusts are not the same as living trusts designed to
protect the inheritance you want to leave for your family and avoid the court
process of probate in the event of your death or incapacity. Living trusts are revocable,
meaning you still own the
assets held by the trust while you’re alive, and as such, you can dissolve the
trust or change its terms at any point during your lifetime.
Since
you retain ownership of assets held by revocable living trusts, a revocable
living trust does not provide your business with any asset protection from
creditors or lawsuits. Asset protection trusts, however, are irrevocable.
The
most airtight asset protection is provided when you never own your business to
begin with, and when the business is started by you as the trustee of an
irrevocable trust set up for you by a parent, grandparent, or other relative.
Additionally, if you anticipate growing the value of the business
significantly, this kind of trust can also protect you from estate taxes.
The
one hitch with such trusts is that you have to have parents or grandparents who
thought ahead and left you an inheritance inside an irrevocable trust at their
death, or who are willing to set up an asset protection trust for you during
their lifetime, so you can start your business with this level of protection.
On
the other hand, if your business is already up and running and you want to
protect it using asset-protection trusts, you can transfer your business into a
creditor-shielded asset protection trust. However, in this case, there are many
restrictions, and your protections will only begin after several years,
depending on the state in which the trust is established.
In
either case, if an asset protection trust is something you’d like to consider
for your business, contact us to discuss your
options.
Get Professional Support
To
make certain that your asset protection strategies are put in place and
maintained properly, working with an experienced business lawyer like us is a
must. Whatever you do, don’t try to handle your asset protection planning
yourself by using online incorporation services, do-it-yourself online legal
documents, or by purchasing a prepackaged asset-protection plan. These options
are a recipe for disaster; asset protection requires complex planning and real
legal experience, and you could lose both your business and personal assets if
you get things wrong.
Rather
than trying to go it alone, get professional support by having us develop your
asset protection plan. We will support you to
create, implement, and enforce a full array of asset protection strategies at
every stage of your company’s evolution. Contact us today to schedule an analysis of
your business’ current risk exposure, so we can ensure your company’s legal
foundation is strong enough to withstand whatever threats you might face both
now and in the future.
This article is a service of Ganvir
Law, Personal Family Lawyer™. We offer a complete spectrum of legal services for
businesses and can help you make the wisest choices on how to deal with your
business throughout life and in the event of your death. We also offer a Business
Strategy Session for an ongoing business, which includes a review of all the
legal, financial, and tax systems you need for your business. Call us today to
schedule.
The content is sourced from Personal Family
Lawyer® for use by Personal Family Lawyer firms, a source believed to be
providing accurate information. This material was created for educational and
informational purposes only and is not intended as ERISA, tax, legal, or
investment advice. If you are seeking legal advice specific to your needs, such
advice services must be obtained on your own separate from this educational
material.