Most small business owners are aware of the importance of protecting their personal assets from business liabilities. However, the reverse is just as necessary – protecting your business assets from personal legal troubles.
For example, if you are at fault in a serious auto accident that injures someone and you own a business, the assets of that business could be under attack in a personal injury lawsuit unless you have undertaken the proper steps to insulate your business from personal liabilities. Here are three things you can do to shelter your business today:
List all your assets. Make a list of all of your personal assets – both business and personal – including any debt that is secured by the asset. This list will be the beginning of your process helping you to evaluate your exposure to risk.
Look into Umbrella insurance coverage. An umbrella insurance policy covers any claims against you in excess of your basic insurance coverage limits. By having umbrella coverage, which is typically, not very expensive, you can ensure any judgments against you are paid before your business is put at risk to satisfy a judgment creditor. Beware though, this type of insurance typically does not cover actions that are negligent, reckless, fraudulent or criminal.
Consider whether your business entity has extra built in protection. If your business has been set up as a limited liability company (LLC) in a state with charging order protection (and there are 13 states that have LLC Charging Order Protection), you may have extra protection for your business. If you have an LLC formed in a state with this extra protection and a judgment creditor tries to take your business, they cannot. Instead, all they will receive is a charging order against the business. This means that they would get distributions only when the other members do, but they would still need to pay taxes on undistributed profits AND they couldn’t even force any profits. Many creditors would prefer to settle for pennies on the dollar rather than receive a charging order against a business entity.
Best Form of Protection. If asset protection is extremely important to you, consider irrevocable trust planning. A properly set up irrevocable trust could protect your business from divorce, creditors or even bankruptcy.