Business owners who have acquired a lot of personal assets face the possibility of having their assets targeted by creditors who want to resolve a business liability. This is especially true in the case of a business owner who guarantees a debt of the business with his personal assets.
Setting up you business structure correctly helps protect your assets. Although many business owners go through the process of protecting their assets from business liabilities, there are some aspects of asset protection that you may not have considered which could put your assets at risk.
Legitimate Asset Protection Doesn’t Mean Tax Avoidance
If you have ever Googled “Asset Protection” there is good chance your search returned dozens of ads and sites that profess to specialize in asset protection strategies. Upon closer review you will most likely find that most of them are offering up a magic bullet which consists of some off shore haven to serve as a resting place for your assets. These “solutions” should be approached with great caution.
Moving assets to another location does not mean you are exempt from US taxes. There are ample tax fraud cases that have involved people who have used off shore accounts and other methods purely as a tax avoidance scheme to make it very clear that the taxpayer can end up the loser in such schemes.
Legitimate asset protection strategies sometimes do involve methods for moving assets to off shore financial institutions to be out of the reach of creditors, but such strategies are not for the do-it-yourselfer. If you are contemplating such a scenario, you need to consult with an attorney who specializes in international asset holdings and can thoroughly explain all the issues & risks involved.
Also, if it is found that assets were moved in an attempt to defraud a creditor, there is plenty of case law to land you in a heap of legal and financial trouble. So, beware of anyone offering you an easy, packaged “solution” like this.
Don’t Mix Business and Personal
This one is pretty straightforward, but very hard to do. Don’t personally guarantee business obligations. Practically speaking, most banks and vendors ask small business owners to personally guarantee major purchases or loans, so you may not be able to avoid it. This is particularly true in the early years before a business has a track record or if the business is a service business because there aren’t any hard assets to use as collateral.
If you need to do so, you should keep track of those agreements and see if you can renegotiate them once you have a track record with the bank or vendor. And, if you can, avoid signing them in the first place. Even “business” credit cards are usually personally guaranteed by the owner…it’s in that troublesome small print. So, if you and your employees carry balances on business credit cards, this may come home to haunt you at a later date. Here again, sometimes after being in business for a few years, you can apply for a different type of card. It is worth shopping around to find a credit card provider who has a true commercial type of card.
Use Insurance to Protect Assets
A legitimate asset protection planner will recommend that, one of the first strategies to employ is to purchase the appropriate types of insurance to protect you and your business. Particularly when it comes to liability insurance, you should purchase amounts that are in keeping with the amount & type of assets you are trying to protect and which are reasonable for the types of risk you might face from creditors. Litigants are more apt to follow the deep pockets of an insurance company in a lawsuit and the insurance will also provide you with defense costs – and legal fees can sometimes be more expensive than the settlement.
They Can’t Get What You Don’t Own
Among the basic principles of asset protection planning is the transfer of assets in a way that insulates the business owner from ownership while enabling them to maintain control. But this is tricky, and you definitely need legal advice to get it right.
State and federal law impacts how things play out and if you’re using a tool like an Irrevocable Trust, you need to be sure you understand the ramifications of such a strategy. You can protect the asset, but you truly will have given up legal ownership of the asset….so proceed with due caution. With an irrevocable trust, a trustee is assigned ownership of an asset such as real property or even the business. Once transferred, these assets no longer have to be included on the financial statement of the business owner. You can’t use this strategy once assets are under attack. It is important to transfer assets well before problems emerge to avoid any contemplation of fraud. And, again, use an attorney with experience in this field.
Not All LLCs Are Alike
LLCs have risen to prominence as a legitimate way to insulate the business owner from business liabilities, provided they are properly set up and administered. However, should a claim be brought against your owner’s interest in the LLC, you may not have the protection you thought.
Only a hand full of states, such as Nevada and Alaska, allow the formation of an LLC that will actually provide protection against a creditor that wants to seize the ownership of the business owners’ interest in the LLC. Many states allow the LLC ownership interest to be held in another legal entity, such as a corporation. This is one way to potentially protect your ownership interest.
State law generally provides that the interests of an LLC are governed by the state in which the LLC was formed regardless of where the business is located. If the state in which your LLC is formed does not provide the extra protection of individual interests within the LLC or allow you to otherwise protect your ownership interest, you may want to consider a change in your LLC’s state of registration.
Using any of these options requires consultation with qualified professionals, be it an insurance broker, CPA or attorney. And a holistic strategy may involve using a combination of these or other options.
Don’t put this asset protection process off, particularly if you have substantial business and/or personal assets. Once something happens, it’s too late to protect anything.