Business Owners – How to Protect Your Assets

There are many risks associated with owning, operating and starting a business.  Businesses have a many responsibilities than to just make a profit and spend money.   There are  a variety of claims, lawsuits and professional takers that businesses and entrepreneurs should be cautious of.  Most businesses have a variety of debt and other liabilities of debt that they are responsible for.  There are damage claims, product liability claims,  consumer protection claims as well as several other potential liability that can bankrupt your business. As a business owner or entrepreneur you need to ask yourself if your business assets are separate from your business assets and are you protected in the event that you encounter a business bankruptcy or even worse a personal bankruptcy – most business are not prepared for this type of scenario and are usually not prepared.  For asset protection to be effective its better to be proactive than reactive.

Why Should Businesses Protect Their Assets?

Having an asset protection plan can help to prevent or reduce the risk of losing personal and business assets to creditor’s claims.  Most small business owners go into their entrepreneurship without really knowing the possible risks.  Some of them don’t even know that there are options out there that can help them.  Most of these asset protection plans use legal strategies to deter creditors from seizing the assets.  If you haven’t already taken the time to create an asset protection plan, don’t wait any longer.  After all, the longer you have your plan in effect, the more effective it will be.

There are a variety of different strategies that are used to protect assets.  These can include legal structures like partnerships, corporations and trusts.  Choose the business structure that will work best for your particular business.  This is best determined by taking a closer look at your assets and your creditors.

Types of Claims

There are two main claim types that business owners face.  It is important to understand them, and their differences.

Internal claims are claims that come about from creditors that are limited to the assets of a particular business entity.  An example of this would be a corporation.  If a corporation has a real estate property and someone happens to get injured while on the property, the person who was injured can only make claims against the assets of the corporation.  That is, of course, if an individual didn’t cause them to get injured.

External claims are claims that are not necessarily limited to the particular business entity, and can even pursue personal assets.  An example of this would be a corporation that owns a truck that was driven in negligence and injured someone.  The injured party would have the right to sue the corporation, and the individual driving the truck.

Types of Assets

Now that you are aware of the types of claims, it is also important to learn more about the types of assets that are prone to claims.  They are referred to as dangerous assets, and they can bring about a lot of liability.  A few of the most dangerous types of assets include real estate rentals, commercial properties, business tools and equipment, and vehicles.  There are also some assets that are considered to be safe assets.  These may include stocks, bonds and financial accounts owned by the business.

Having a good understanding of the types of assets is really important when you are putting together your asset protection plan.  You want to avoid mixing your dangerous assets and safe assets.  This will help to prevent trouble down the road.

Asset Protection Strategies

There are several strategies to help protect your business and personal assets.  A few of the most common types of asset protection vehicles include partnerships, corporations and trusts.

General Partnership

A general partnership is a partnership in which two or more people carry on business endeavors together.  This can either be a written agreement or an oral agreement.  It is one of the commonly avoided partnerships because it can result in a high amount of debt for both parties.  In fact, both parties will be liable for the entire debt of the business, even the debts that were incurred by the other partners.  In this type of partnership, both partners will have the same liability.

Limited Partnership

A limited partnership is a partnership that is authorized by the state law and can consist of more than one partner. The partners can either be limited partners or general partners.  A general partner is usually responsible for conducting the management of the business, and they also have personal liability for the debts and obligations taken on by the business.   Limited partners do not have any personal liability beyond what they contribute.  They are protected, and that usually means they have less of a say so in management.  When a partner becomes more active, they may lose their limited liability protection.

Corporations

Corporations are a common business structure that is regulated by state laws.  The ownership of the corporation belongs to the shareholders.  The shareholders are able to elect a B of D, or board of director, that will handle the management of the business.  This board will elect officers that handle the day to day business responsibilities.

There are a few different types of corporations, including business corporations, S corporations and limited liability corporations.  When a business is a part of a corporation, claimants are only able to go after business assets and are unable to touch personal assets.

S Corporations

An S corporation is a corporation that allows corporate profits to be taxed at the shareholder level.  There are some certain qualifications that must be met in order to determine the amount of limited liability granted to this type of corporation.

Limited Liability Corporations

Since there are a lot of formal issues associated with S corporations, many businesses are opting for limited liability corporations.  This gives similar protection, but it does not have as many formalities and restrictions involved as the other types of corporations do.

Trusts

A trust is basically an agreement between a trustor and a trustee.  A trust will basically give the trustee access to manage assets for the benefit of a beneficiary.  Trusts that are created while the trustor is still alive are called living trusts.  Trusts that are created when a trustor dies are considered a testamentary trust.  Trusts have been effective when it comes to protecting business assets.  There are two main types, which include revocable and irrevocable.  Revocable trusts give the trustor the right to alter it or revoke it.  Irrevocable trusts are not able to be altered.  Irrevocable trusts can be used to protect assets, because it basically takes assets out of your control and then they cannot be touched in a lawsuit.

How to Know What is Right For Your Business

These popular types of asset protection structures can be used to your benefit, but how can you consider which one is right for your business?

If you have a professional business, then you will probably want to consider incorporating the business.  This will help to protect your personal assets in the event of a claim.  While this is true, some business owners are choosing the limited liability corporation option.  An LLC can be a convenient option, and it is also much less expensive than some of the other alternatives.  LLC laws can differ from one territory to the next, but most of the time will prove to protect personal assets.

There are some businesses that are unable to take on an LLC.  Some of these include physicians, attorneys, dentists, psychiatrists, and a few others.  If you are not able to take on an LLC, then a family limited partnership may be a viable option.  This will allow you to protect a portion of your personal assets.

Is General Partnership a Good Idea?

Generally, a general partnership should be avoided.  This is due to the fact that both partners are responsible, even if they did not know what was going on at the time.  This can increase your chances of becoming personally liable for any claims made.  If you are already in a general partnership, you will want to consider finding a way to protect your personal assets.  Without doing this, you could find yourself in a bind down the road.

The Bottom Line

An asset protection plan is definitely an important aspect that businesses should consider.  When creating your plan, you will want to make sure that you protect your business and personal assets.  Protecting your business is definitely something that is encouraged, as long as it is done honestly and legally.  If you don’t do it honestly and legally, it can be considered fraud.  Make sure that you consider discussing your options with an attorney or a business financial advisor before you finalize your plan.