4 Foundational Asset Protection Vehicles For Business Owners

February 13th, 2023

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.