As a business owner, you know how to make money – the right idea, at the right time, with the right plan, and pursued diligently is a solid formula for success. With financial independence as your goal, the question becomes, “Do you know how to keep your personal assets safe?”
The unfortunate reality is that, the moment a business opens it doors, it becomes a target for creditors, litigants, disgruntled employees, divorce attorneys, customers and regulators. For anyone in pursuit of a monetary resolution for a debt or a grievance, the business owner’s assets are considered fair game to the extent that they can be reached.
It is never too early for an entrepreneur to seek advice on the legal protections and risk management techniques that are available to them. Even if you aren’t using them right now, understanding the risks and the opportunity for protecting yourself is critical.
You can make use of the ones that make sense for your circumstances. But it’s also important to always consider the tax consequences of your actions, along with the legal. You need to balance both before making a decision.
An Asset Protection for Small Business Owners
Know How to Structure Your Business
The way you set up and run your business does make a difference. The law provides several ways for a business owner to structure the business so that a legal divide exists between the assets of the business and the personal assets of the business owner.
For example, the Limited Liability Company (LLC) structure is fast becoming a preferred method for small businesses to organize in a way that shields personal assets from creditor or claimant assaults, but there are a number of options available. LLCs are interpreted differently in different states so it would important to know which states (an LLC can be established in a state other than where the owner resides) provide the greatest protection. Incorporation also provides owner asset protection.
Whatever entity you choose, you must run it appropriately to actually have the protection you seek.
Learn about Irrevocable Trusts
Establishing an Irrevocable Trust is one way to remove assets from your ownership. But by transferring your assets into that type of trust, you give up control of the assets which is something many small business owners are unwilling to do even if it helps keep the assets beyond the reach of creditors. A named trustee continues to manage the assets, but you are unable to control them. Before taking this route be sure you have competent legal counsel because you can’t change your mind.
Properly Insure your Business
Insurance can provide excellent protection against business related liabilities. Coverage can protect you against judgments and also the costs of defending against litigation. The cost of legal services in litigation continues to skyrocket – even if you win, you still have attorneys to pay. So have a thorough conversation with your insurance broker about your potential areas of risk & get proper coverage. By raising deductibles, you can often afford higher coverage limits so explore those options as well.
Protect your Retirement Plans
The protections for qualified retirement plans are varied and complicated depending on the type of plan, the state in which you reside, and the particular kind of protection you need. For the most part, retirement plans are protected by federal bankruptcy laws, however, there may be some limits on the protection imposed by the states.
Also, protection against general creditors and liabilities varies by state and based on the type of retirement plan. For a business owner, any plan that is considered to be an ERISA plan is probably protected from bankruptcy. But any plan that solely benefits the owner may not be protected. Only when an ERISA plan includes at least one other employee does it receive protection from liabilities outside of than bankruptcy.
You know how to make money, but, if the reason for doing so is to achieve lifelong financial independence, you may want to study up on how to keep it out of the hands of those who want to make your money theirs.
Get Legal & Financial Advice
Setting up a solid asset protection plan requires competent legal and financial advice. The choices all have legal & tax consequences, so do your research and get the seek out the professional advice you need before making any final decisions.
And, remember, this isn’t about hiding assets or avoiding taxes; it’s about protecting your personal assets. Be careful of tax avoidance scam artists who can get you in a whole heap of trouble with the IRS or the law.