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. These risks also don’t care what industry or market you’re in.
Unfortunately, most business owners aren’t fully aware of all the potential risks that can affect their company. There are options they may have available to protect their personal assets from the risks of doing business. This is the core of asset protection planning.
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 sooner rather than later, 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. This means 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 to you.
While the specific protections you require will largely depend on the specifics of your business and your personal assets, the following four structures form the foundation of most business owners’ asset-protection planning.
1. Business Entities
The most fundamental asset protection strategy is setting up the proper entity structure for your business from the start. Without the correct entity in place, your personal assets would be at risk if your business ever gets into debt that it cannot pay, or is hit with a lawsuit.
For example, if your company is structured as a sole proprietorship or general partnership and you go out of business, creditors could come after your personal assets to pay off your business debts. Similarly, if your sole proprietorship or general partnership is hit with a lawsuit, your personal assets could be seized to satisfy a judgment.
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 is distinct from you as an individual, which largely 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.
That said, you can be held personally liable in certain situations, such as if your entity isn’t maintained properly or you mistakenly commingle your personal and business finances. In that case, a court may hold you personally liable for the debts and liabilities of your business. When this happens, it’s known as “piercing the corporate veil.”
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. The consequences of not maintaining your business entity are just too high, and by the time you are facing those consequences, it’s too late to do anything about it.
We offer you a number of legal and financial systems that make keeping up with your entity’s administrative and compliance formalities a snap. Email us at [email protected] or call us at (954) 267-4011, to find out what entity structure is best suited for your business and how we can ensure you have the maximum liability protection possible.
2. Business Insurance
The true first line of defense of asset protection is 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. 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. Additionally, you should also consider investing in umbrella insurance, which would cover you for any damages in excess of your other individual policies. Insurance is the cheapest money you can buy. Let that sink in for a moment.
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. You don’t even have to have done anything wrong to get sued. Yet whether you are in the wrong or in 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 defend you—and that could be the most important reason to get insurance.
3. Legal Agreements
Most people overlook legal agreements as one of the key parts of your asset protection plan. But, 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 DIY (Do-It-Yourself) legal forms you find online when creating your business agreements. If you had a question or needed actual legal help, would you rather be able to speak to the same person or call a random 800 number only to get a customer service representative? Here at Yolofsky Law, we are here 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.
When creating legal agreements, remember this: the most important part of your legal agreements is the process by which you reach an agreement as well as the clarity of the documented terms, so if there is a later dispute you’ve already established how you will handle and resolve conflict. Template form documents, or “cheap legal” in the form of a lawyer who doesn’t understand your business’s relational aspects simply won’t cut it. You want to work with a relational lawyer who understands how to keep businesses out of court and conflict.
If you are going it alone with legal agreements, be sure that you enter into all agreements in the name of your business entity, not in your personal name. And whenever possible, be sure that your legal agreements include provisions requiring conflict resolution through mediation and arbitration before litigation, which should always be a last resort.
Furthermore, in certain cases, 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, when it comes to limiting liability through legal agreements, state law varies widely, so your agreements should be prepared and reviewed by a business attorney licensed that you can actually shake hands in person!
4. 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.
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.
Since you retain ownership of assets held by revocable living trusts, a revocable living trust does not provide your business with any asset protection from creditors or lawsuits. Asset protection trusts, however, are irrevocable.
The most airtight asset protection is possible 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. Additionally, if you anticipate growing the value of the business significantly, this kind of trust can also protect you from estate taxes.
The caveat 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.
Please be aware that only certain States permit these types of self-settled trusts. Self-settled means the Grantor (creator), Trustee (manager), and Beneficiary are the same person. Florida is NOT one of these States. Do not try this at home!
How to 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. There are many promoters selling kits, seminars, and programs that claim to provide “asset protection”. If the person talking isn’t a licensed attorney – RUN AWAY.
Rather than trying to go it alone, get professional support by having us develop your asset protection plan. At Yolofsky Law, we will support you to create, implement, and enforce a full array of asset protection strategies at every stage of your company’s evolution. Call today (954)237-4011 or email us at [email protected] 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.