Being an entrepreneur can be a tricky business. Many risks are involved in your day-to-day activities, like dealing with employees, handling goods and services, and making investments.
Because society can be quite litigious, most entrepreneurs use asset protection as a safety net to protect their investments. Asset protection is a part of financial planning meant to protect your assets from anyone who may want to claim them.
What Is Asset Protection?
Asset protection involves a set of legal and financial techniques used to protect the investments of businesses and individuals from civil liability. Asset protection insulates your assets from creditor claims without perjury. Asset protection also minimizes your risk of losing your acquisitions when your business suffers financial setbacks.
Therefore, individuals and entrepreneurs use asset protection strategies to limit creditors’ access to their valuable assets. It’s legal and operates within the confines of debtor-creditor laws.
Benefits Of Asset Protection
Asset protection is a way of shielding your assets and business from the effects of claims, bankruptcy claims, marital problems, lawsuits, and other unfortunate events. It can also prevent your business from taking massive blows during financial crises.
Asset protection is imperative whether you’re a private venture or a major business. It has many benefits, including the following:
- Decreased risk of lawsuits: If your assets are secured, it’s harder for a loan shark to take over your assets.
- Minimized loss: Asset protection can shield against the risk of lawsuit losses.
- Minimized conflicts: It reduces possible disputes over who owns what. Also, if you’re in a business venture, it can protect your assets from loss due to mismanagement.
- Estate planning: When your assets are protected, you know you can include them in your will.
- Peace of mind: Proper asset protection could relieve the stress of worrying over your hard-earned investments. It protects them from unforeseen threats from taxation, creditors, authorities, or anyone else.
- Reduced tax: A proper asset protection plan will make your overall tax liability manageable.
Asset Protection Checklist For Entrepreneurs
If you’re thinking of protecting your assets, here is a checklist to help you:
#1 Establish A Limited Liability Company
Your first port of asset protection should be to separate your personal assets from your business investments. Apart from establishing your enterprises in states with best asset protection, you could also protect your assets by establishing a limited liability business structure.
Your business assets are not legally protected by default if you operate as a sole proprietor or partnership. As a sole proprietor, your business assets can easily get mixed up with your personal ones. Although both entities are easy to create, they could cause problems when creditors come for you.
However, the good news is that you could safeguard your personal assets by creating a limited liability company (LLC). In a limited liability structure, the business owners are not liable for the company’s debts. If, for example, your business is sued by a creditor, the unlimited liability structure restricts liability only to the assets belonging to the business.
Your first step to protecting your investments should clearly distinguish your personal and business assets. To further establish separation between personal and business properties, you have to ensure strict adherence to good business practices such as separate bank accounts and strict compliance with other business laws. Also, avoid commingling personal funds with business accounts to further establish a separation.
#2 Open A Bank Account In The Business Name
When starting your enterprise, ensure you open a bank account in the name of your business. This will provide a complete separation between your personal finances and those belonging to your business. All your financial transactions, including income and expenses, should go through your business bank account.
If you have different subsidiaries, ensure each has a separate bank account. For example, if you decide to have one bank account, make sure you have detailed accounting records to show the income and expenses of every transaction.
As a rule of thumb, avoid personal expenditures from your company funds. So, if you use your company funds for personal use, your assets can be considered business assets. This leaves them at risk of being attached when creators sue.
#3 Separate Multiple Business Ventures
If you own multiple businesses, you’ll have to ensure you protect your business assets for each company. To do this, make sure there’s a separation of assets. Separating your different entities’ assets helps ensure individual legal use and liabilities for each business.
Ensure that all the bank accounts, documentation, and financial records show a complete separation. If one of the businesses is under some liability, the assets of the other entities will remain untouched.
#4 Ensure Proper Income Tax Reporting
As a follow-up to having separate bank accounts and financial activities, ensure that each business files its own tax returns. On the other hand, subsidies may not necessarily need to file individual returns; the master can do it. For example, your company accountant or tax consultant can ensure the proper filing of tax returns.
Never neglect to file your annual returns. Failure to do so could result in your company being administratively dissolved. This will resultantly leave your assets with no protection.
#5 Get Some Insurance
Just as in any other business, accidents can happen. One of the ways to avoid problems when mishaps happen is getting sufficient insurance cover. If you secure an insurance policy, ensure you have enough coverage to protect all your assets. As an entrepreneur, you have various insurance options, so speak to an insurance broker and see what best suits your business.
#6 Set Up A Holding Company
Sometimes an insurance policy may be inadequate to protect your assets. For example, one may lapse, or a complication may lead a broker to refuse to pay. One way to guarantee protection is by setting up a holding company.
A holding company’s primary goal is to have a controlling interest in other companies. It typically doesn’t produce or supply goods or services, but its sole objective is to own controlling shares of other companies. It usually forms a corporate group.
When you set up the holding company, you increase your chances of protecting the company assets of all your business interests. For a problem to affect you, it must go through all the companies and the holding LLC. Therefore, you could look at a holding company as a double layer of protection from litigators or creditors.
#7 Avoid Personal Guarantees
Always avoid personal guarantees. These agreements hold you personally responsible for your business debts if your business fails to settle. Try negotiating for an alternative when a vendor requests you to sign a personal guarantee. You’d instead ask for a higher payment instead of signing a personal guarantee. It leaves your personal assets at risk of attachment if your business fails to pay a debt.
#8 Transfer Some Assets To A Trust
A trust is a legal tool that grants a third party, known as a trustee, control of assets on behalf of a beneficiary. There are many types of trusts to choose from. Nonetheless, most entrepreneurs prefer irrevocable trust.
In an irrevocable trust, the business owner relinquishes control and ownership of his business assets to the trust. That way, the assets are not at risk of any loss associated with the business. Therefore, to ensure the protection of your assets, weigh your options and pick one that works for you.
#9 Set Up An Offshore Asset Protection Trust
You could consider setting up an offshore trust if you’re at a higher risk of losing your assets. This trust is created in a foreign country, usually the Cook Islands, Cayman Islands, or the Isle of Man. You could speak to an experienced asset protection attorney to protect your assets this way.
#10 Properly Title Your Property
Another easy way to protect your assets is by ensuring that all your property is appropriately titled. This means your assets must be in either your or your LLC’s name. Making this distinction from the start could protect your personal assets if your business takes a knock.
#11 Avoid Fraudulent Businesses
It goes without saying that if you operate your business enterprise legally with full compliance, you’ll avoid run-ins with litigators and creditors. That way, you can reduce the risk of losing your assets due to litigation. Being compliant also saves you the trouble of creating unnecessary debts, which could cause headaches.
#12 Get An Experienced Asset Protection Attorney
Most states have laws protecting certain assets from being seized by creditors. Therefore, an asset protection attorney will trace all your assets and find ways to protect them. In addition, asset protection attorneys will have various legal methods to limit the reach of litigators and creditors from accessing your assets.
As an entrepreneur, you may encounter many challenges, including possible conflicts with litigators and creditors. If you own business property or other types of wealth, you would want to legally safeguard them from anyone who may wish to claim them. You could lose your assets if such people win a lawsuit against you. To avoid this, consider the tips given here. Best of luck!