When it comes to running a business, every step you take along your path carries an element of risk, whether it's a shop floor accident, a disgruntled customer, or a liquidity crisis resulting in a bad cheque.
To make matters worse, if there is one thing that all of these outcomes have in common, it is the potential to land you and your business in court, fighting a liability claim. If you end up on the losing side, there is a real risk of a mortal blow to your business, especially if it is in the early stages of growth.
Claims can also put a drain on your personal assets, too, including your home, car, savings, investments, and any other valuable things that you own, the severity of which goes without saying.
So, what can you do to ensure that none of this happens?
Protecting Your Business Assets
Asset protection is of paramount importance to business owners. It helps place extensive legal boundaries on what can be claimed by creditors and other litigants who sue your business for damages.
There are numerous asset protection strategies out there, and many of them are targeted at small enterprises. Your choice would largely depend on the nature of the claims your business might face, and more importantly, the type and magnitude of assets involved.
Consider the example of a delivery van owned by your company. You have an employee to drive it. If during its rounds, someone gets hurt in an accident, the resulting claim would be an internal claim to you; this means that only assets that are owned by your company can be seized to honour the claims of the injured party.
If on the other hand, you were personally driving the van during the accident, the suit and claims are no longer solely within the realm of your company's assets. You can be held personally liable, and your assets, which are external to the firm, can end up getting seized. This is a classic example of an external claim.
Those assets that have the potential to cause injury or liability are called dangerous assets. Real estate, buildings, vehicles, tools, and other equipment all fall under this category. In contrast, safe assets, such as accounts, stocks, and bonds, have minimal chance of causing any kinds of injury capable of creating damage claims.
To protect yourself and your assets against any of these claims, you should adopt the following strategies:
1. Separate Business from Personal
Some of the most popular strategies call for changes in the legal and ownership status of your business. This can be a bridge too far if you are at a very early stage in your enterprise, but asset protection has to start somewhere, and the earlier it happens, the better.
The best thing to do when you start a business is to open separate bank accounts and credit cards for your company. Straight away, always ensure that you don't make a habit of using your company accounts for personal needs and vice versa.
This arrangement can provide limited asset protection in the early days of your business. It is not much, but as an entrepreneur, it is highly beneficial if you learn these habits early.
2. Get Liability Insurance
You don't drive a car without accident insurance because that would be a pretty daft thing to do (not to mention illegal). The same logic is also applicable to liability insurance for your business. It will undoubtedly increase your expenses, but the peace of mind you get is well worth the bargain.
Insurance coverage types and costs can widely vary depending on the nature and location of your business; if it involves dangerous chemicals or vehicles, such as a trucking business, for example, then expect the costs to be on the higher side. Some industries, meanwhile, have special coverage packages, like in the case of doctors (malpractice coverage).
Having proper insurance coverage is essential throughout the lifetime of your business. In the early stages where it is not big or successful enough to be converted into a complicated LLC, insurance will help significantly boost the level of protection your personal assets receive against claims and lawsuits.
3. Utilise Contracts and Legal Agreements
Conducting business without the cover of legally binding contractual agreements is a big no-no if you want to avoid litigation. Contracts are incredibly important as they often clearly spell out the limits of your business liability to others involved in the transaction.
Operating without one is like playing with fire - you never know when you are going to get burnt. Besides claims, such activity can also bring your business under the scrutiny of tax authorities and other agencies related to compliance.
4. Transfer Assets to Family Members
This is an especially useful option if you have to remain in a sole proprietorship or partnership for the foreseeable future. One of the most common asset protection strategies is to transfer ownership of a few critical assets to a close family member, such as a spouse, sibling, or child.
However, this is only useful if the given family member has no stake in or connection to the business whatsoever. If the claimants can prove otherwise, the courts will rule in their favour. Needless to say, this method does have some not insignificant risks, as you will be ceding control over your assets to another individual, even if they are a close family member.
5. Form a Limited Liability Company
The form of business organisation with the least degree of asset protection is undoubtedly the sole proprietorship model, followed by the partnership model. To put it bluntly: if you are the single owner of your business, your personal assets have zero protection.
A partnership is marginally better, but not by a significant distance. Even though the risk is shared among individuals, each person's assets are still at risk proportional to their stake in the business.
Changing the legal status of your company is highly recommended if you want to remove the risk to your personal assets altogether. As the name suggests, a Limited Liability Company (LLC) is the best option, as it is designed almost solely to offer maximum asset protection, while forming a holding company is another option that has numerous benefits.
6. Create an Asset Protection Trust
A trust is a financial entity you create to transfer ownership of your assets to a third party (the trustee). There are several different types of trusts, and not all of them are protected from liability claims. If you want to preserve some assets for the benefit of your children's future, for example, then you can opt for a private family trust.
From a business perspective, the best choice is an asset protection trust, which is designed to keep your assets away from the claims of settlors and any other disgruntled creditors. Assets in such trusts are often bequeathed to children or family members once you pass away.
Asset protection strategies can vary significantly by location, as the legal foundations they are built upon are highly dependant on local jurisdiction. Therefore, as a business owner, it is your responsibility to educate yourself; a lack of awareness about relevant laws simply serves to magnify your personal liability.
For best results, it is often a good idea to approach a professional consultant, especially once your business grows and things start to get complicated. In the early days of your business, though, you should take it upon yourself to learn the ropes and undertake your own asset protection measures.
What else should business owners keep in mind when it comes to asset protection? Let us know in the comments below.