No matter the industry you are in, as a business owner, you are open to several unique risks that most people don’t have to worry about. The truth is, the more successful your business is, the more threats you may face.
Unfortunately, most business owners aren’t fully aware of all the potential risks that can affect their company or the options available to protect their personal assets from the dangers of a business. This is where asset protection planning plays a significant role.
Asset protection planning is designed to reduce or eliminate business risks 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. Once a claim is filed, it is too late. In fact, you can be charged with fraud if you take specific actions after a claim or lawsuit.
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. Depending on your business, you will require more specific protection. However, the following four vehicles form the foundation of most business owners’ asset-protection planning.
- Business Entities
One of the most fundamental asset protection strategies is setting up the proper entity structure for your business. Without the correct entity in place, your assets would be at risk if your business ever gets into debt that it cannot pay or is hit with a lawsuit.
For instance, suppose your company is structured as a sole proprietorship or general partnership, and you go out of business. In that case, creditors could come after your assets to pay off your business debts. Similarly, your assets could be seized to satisfy a judgment if your sole proprietorship or general partnership is hit with a lawsuit.
By structuring your business as a limited liability company (LLC) or corporation, you can shield your assets from liabilities incurred by your business. These structures establish your company as a separate legal entity distinct from you as an individual, preventing you from being personally liable for the company’s debts or legal liabilities.
It is vital to properly maintain your entity’s administrative formalities and keep your business and personal assets separate. LLCs and corporations effectively create a barrier between you and your business activities. Creditors, clients, and other potentially litigious entities can go after your business assets, not your personal ones.
This is why working with a lawyer is vital to set up and maintain your business entity and not try to handle it alone. The consequences of not maintaining your business entity are just too high; by the time you face those consequences, it’s too late to do anything about it.
Meet with us to determine what entity structure best suits your business and how we can ensure you have the maximum liability protection possible.
- Legal Agreements
Legal agreements are likely the most essential part of your asset protection plan. Legal agreements protect your company’s most critical elements: your personal liability, personal and professional relationships, intellectual property, and trade secrets, to name just a few.
Similarly, legal agreements govern the rights and responsibilities of every party you work with, from clients and vendors to employees and contractors. Given the importance of such documents, you should never rely on generic forms you find online when creating your business agreements.
When creating legal agreements, remember this: the most critical part of your legal agreements is the process by which you reach a deal and the clarity of the documented terms. Template form documents, or “cheap legal” in the form of a lawyer who doesn’t comprehend your business’s relational aspects simply won’t cut it.
If you are going it alone with legal agreements, be sure to enter into all contracts in the name of your business entity, not in your personal name. Ensure that your legal agreements include provisions requiring conflict resolution through mediation and arbitration before litigation, which should always be a last resort.
Furthermore, in some instances, 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, state law restrictions widely range when it comes to restricting liability through legal agreements, so your agreements should be prepared and reviewed by a business attorney licensed in our state like us.
- 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 single catastrophic event or lawsuit can wipe out your company, it’s vital to have the proper insurance coverage in place from the very 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.
Finally, if you are considering letting insurance wait or not making insurance a priority, remember this: anyone can sue anytime for anything. You don’t even have to have done anything wrong to get sued. Yet whether you are in the wrong or 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 protect you—which could be the most crucial reason to get insurance.
- Trusts
Business entities protect your personal assets from your business activities, but by using a specially designed irrevocable trust, you can protect your business from your personal activities. Such trusts are set up so that your business is owned by the trust rather than you. 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 severe 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.
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 another relative.
The one hitch with such trusts is that you must 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 that 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. Nonetheless, there are many restrictions in this case, and your protections will only begin after several years, depending on the state where 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 further.
Get Professional Support Today
To ensure that your asset protection strategies are put in place and adequately maintained, working with an experienced business lawyer is a must. Don’t try to handle your asset-protection planning by using online incorporation services, do-it-yourself online legal documents, or purchasing a prepackaged asset-protection plan. These options are a recipe for disaster; asset protection requires complex planning and real legal experience. Remember, 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. At Legacy Counsel, we guide and support you to create, implement, and enforce a full array of asset protection vehicles at every stage of your company’s evolution. Call today to schedule a meeting, so we can ensure your company’s legal foundation is strong enough to withstand any threats you might face both now and in the future.
