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. 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.
While
the specific protections you require will largely depend on the specifics of
your business and your personal assets, the following four vehicles are the
crucial 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. 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.
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. We offer you a
number of legal and financial systems that make keeping up with your entity’s
administrative and compliance formalities a snap.
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. 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. 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.
03 - Legal Agreements
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. 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. 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.
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.
Therefore,
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.
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.