To mitigate risk, separate your personal and business assets
Approach your insurance coverage and your company’s legal structure thoughtfully to help distance your personal assets from your business’s.
Along with the rewards of business ownership come risks – including risks to personal assets should action be brought against your business. Here are some asset protection strategies worth considering:
Diversify your legal instruments
Begin by separating your personal world from your professional one by making your business a standalone company. This includes choosing the type of entity your business will be; it matters.
Though popular, sole proprietorships and general partnerships leave owners liable for any company debts, judgments and lawsuits, and creditors can lay claim to both personal and business assets. For more rigorous protection of personal assets, consider the primary benefits of an S or C corporation or a limited liability company (LLC). In an S corporation, shareholders can be held liable only for the money they invest in the business, and creditors are unable to seize personal assets in the event of a lawsuit or other loss. In a C corporation or LLC, there is limited legal liability for directors, officers, workers and shareholders.
All corporate documents should be created by a qualified attorney and kept readily available. Annual maintenance includes paying the required fees to the state, holding mandatory meetings and keeping minutes. Maintain separate financial accounts for your personal life and business and use the company name on corporate documents.
Add another layer
If your corporation owns property, you can add a second layer of separation between your personal assets and anyone seeking damages from an injury that occurs on the property by having the property owned by a separate LLC. Make sure the entity has a written procedure in place for fixing hazards when identified. Consult an attorney to determine if a strategy like this is right for you.
Insurance is a must
Rather than targeting the assets of the business, someone seeking damages can pursue the money available through insurance. Purchase the right amount and kind of insurance – type varies depending on whether you rent property, own a rental property, or operate a professional practice or retail space. A knowledgeable insurance agent can advise you on what you need and help you reassess your needs annually.
Once established, keep your strategy maintained to provide years of protection while you grow your business.
Protecting your assets is just as important as protecting your business – especially when you are the business. Some things to think about:
- Decide what business structure works best to protect you from actions against your business.
- Ask your advisor about an owner’s only 401(k) as these vehicles can prevent loss of retirement savings in the event of a lawsuit against your business.
- Talk to an insurance agent to make sure you have the right amount and types of coverage.