This topic is usually associated with high income individuals and medical professionals, but asset protection planning is just as necessary for owners of start-ups and small businesses. In some ways, you are more at risk because you may finance your start-up with personal credit or personal guarantees on business credit.
Unfortunately, asset protection is often ignored or lost in the long list of things to do when starting or building your business. This mistake can cost you and your family when you least expect it.
What’s Involved in Protecting Your Assets?
Asset protection planning is a simple concept. First you catalogue all of your personal and business assets, such as bank and brokerage accounts, personal property and real estate, etc. Next you identify possible financial threats and then you insulate yourself from threats using a combination of different legal entities (trusts, corporations, limited liability companies, etc.) and insurance.
Properly done, this will help protect your current and future assets from loss due to the hazards of everyday life, such as lawsuits, business failures, and creditor claims.
To create an asset protection plan, you’ll need to review your potential exposure to financial loss, assess the different types of protection available, evaluate potential tax issues involved and analyze your ongoing personal financial needs, such as qualifying for mortgages and easily accessing assets when required. You should work with competent financial and legal advisors who are familiar with asset protection strategies.
Small Business Owners Beware
As a small business owner, there are several areas that warrant your concern. The first is to take financial liability issues into account when you choose the type of legal structure within which you’ll run your business (corporation, limited liability company, etc.). Once established, take care to follow the legal requirements of the entity you choose, so that you don’t jeopardize your personal assets. Some examples of this are not mixing business and personal expenses, not treating your business bank accounts as personal piggybanks, keeping necessary records, having the proper corporate officers and establishing a Board of Directors in corporations.
Personal guarantees are another common source of financial exposure. Lenders, landlords and leasing companies often ask for a personal guarantee from the owner of a small business. This means exactly what it says; you are providing a personal guarantee of repayment. If your business can’t make the payments the creditor can and will go after you and your personal assets.
Many entrepreneurs use personal credit cards and credit lines to get started. This may give you the credit you need, but it is ultimately a personal obligation. So if your business doesn’t have the cash flow to pay the bill, you’ll have to deal with these credit balances yourself. And the hefty finance charges can add up fast. Use extreme caution when leveraging personal credit for business use.
And then there is insurance. Small businesses often underinsure to keep overhead expenses low. This is risky. Losses do happen and they can quickly put an under-protected company out of business or hamper it severely. Be realistic when evaluating the type (liability, property, malpractice, etc.) and the amount of insurance you carry.
Be Safe, Not Sorry – Protect Your Assets
Depending on your individual situation, there are a variety of asset protection tools from which to choose ranging from the relatively straightforward, such as insurance, to the extremely complex involving off-shore trusts and multiple legal entities.
Seek the advice of financial planners and attorneys who specialize in this area. It is an investment in your financial security. Once you are on the wrong side of a lawsuit, it is too late to protect your assets.