One of the biggest risks small business owners take is not properly protecting their personal assets from business liabilities or judgments. In a recent Entrepreneur.com article, Mark Kohler, author of The Tax & Legal Playbook, offered these 8 asset protection strategies for business owners:
Choose the right business structure. Operating as a sole proprietorship offers zero asset protection. Consider choosing a business entity that is a limited liability company (LLC) or a corporation to shield your personal assets for business lawsuits.
Keep your entity in good standing. If you have set up an LLC or corporation, there are certain rules that must be followed in order to maintain the limited liability protection of that entity.
Use contracts and agreements. If you are negligent or act fraudulently in conducting business, this opens your personal assets up for attack from creditors. Always use the proper contracts and agreements for business transactions.
Buy insurance. Be sure to purchase business insurance to cover any potential incident so potential plaintiffs have another target rather than coming after you.
Have umbrella insurance. For a relatively low cost ($300-$500/year), you can get $1-$2 million in umbrella coverage above and beyond what you are covered for by your personal or business insurance policy.
Put assets in spouse’s name. When one spouse is engaged in a riskier occupation, it can be advantageous to put personal assets in the name of the other spouse. However, this should not be done without consulting first with a Creative Business Lawyer®.
Use the homestead exemption. Most states offer a homestead exemption on a primary residence that protects a certain amount of your home’s value from creditors or bankruptcy.
Consider tenancy by the entirety. If allowed in your state, you can title your personal residence as “tenancy by the entirety,” which means that if one spouse is sued, the home cannot be attached by a legal judgment.
Use sophisticated trust planning. Going beyond the entrepreneur.com article, we also recommend trust planning as the most airtight form of asset protection. Trust planning works best when it is considered before you have even started a new company and we use strategies that are little known by most professionals, so contact us early on in your planning process if you would like to consider using trusts in your asset protection plans.