Nothing can be more disheartening than losing your hard-earned wealth from creditors, divorce, or an unfairly adjudicated lawsuit. These real-life scenarios can happen to any business owner underscoring the importance of asset protection in any business plan. Without solid asset protection, both your personal and business assets are vulnerable to risks.
In 2018, U.S. District Courts received 277,010 civil case filings. Aside from individuals, businesses have also become a favorite target of lawsuits. Many of cases lodged against business may be considered frivolous cases. One important frivolous case is that of Liebeck vs. McDonalds Restaurant. In this case, the complainant was awarded $2.7 million in punitive damages just for one hot cup of coffee. Cases such as these encourage others to file lawsuits against businesses with the eye on getting a favorable adjudication. For companies, this is a potent threat to their assets.
Aside from lawsuits, creditors can also run after your assets. These creditors will do all means necessary to get as much asset as they can. Likewise, divorce presents a threat to your assets. Without a proper pre-marital or post-marital agreement, your properties can be unduly subjected to legal seizures.
Collaborating with an asset protection service can help you develop a business strategy wherein all your assets are protected against these risks. An asset protection specialist can assist you in identifying and implementing an appropriate and effective plan.
Below we discuss seven vital asset protection methods a specialist would recommend to include in your business strategy.
1. Determine and choose the right business structure
This is one of the most basic asset protection strategies every business should do. It is the first step to ensuring your assets won’t be a target of creditors. Operating as a sole proprietorship exposes your assets to potential creditor claims and litigation. Asset protection specialists would help you identify a business structure that can provide maximum coverage to your business and personal assets. Common business entities include Limited Liability Company (LLC) and S Corporation.
2. Separate business and personal assets
It’s not enough that you set up a business entity. To shield your assets from potential risks, you need to maintain your corporate veil. This means you need to separate business and personal assets. Make sure your assets and money are put under your name and not under your corporation. Keep your corporate records and minutes of meetings intact.
3. Use proper documents and contracts
Another way to keep your assets from creditors is by using the right documents and contracts. Ways to achieve this are: registering equipment and properties under the business’ name, enforcing carefully worded lease agreements for all rentals, and signing contracts with contractors and subcontractors. CS&P asset protection experts also warn business owners against entering into fraudulent transactions or informal agreements such as relying on words-of-honor, informal communications, or emails for deals. In case you’ll need to professional help, such as contractors and legal or tax specialists, be sure that they are insured, bonded and licensed.
4. Keep updated business insurance
Insurance is vital to any business and should high on your priority list. In case a complaint is lodged against your business, your first line of defense is a business insurance policy. It enables you to take care of incidents before it could escalate into a major lawsuit. However, make sure you purchase an appropriate policy that offers maximum protection.
5. Consider comprehensive insurance
Comprehensive insurance provides an “umbrella” over and above other policies that you may have. It can provide coverage for up to several million. However, don’t expect umbrella insurance to ensure you in case of a negligent, fraudulent, reckless, or criminal act.
6. Assigning some assets to your spouse
This is an extremely effective asset protection strategy that completely renders an asset out of reach from creditors and lawsuits. Generally, a creditor can dip into the separate asset of a spouse. In fact, asset protection specialists recommend assigning valuable assets to the least vulnerable spouse. Having a prenuptial or postnuptial marital property agreement can prove to be useful when lawsuits and creditors come knocking at your door.
Take note, however, that marital or estate planning requires careful study. Deeding properties into either spouse involves many potential implications and exceptions. For instance, in case both spouses sign up as co-debtors, registering the property to either spouse would not be able to provide sufficient protection. Furthermore, deeding property into one of the other spouse’s name might cause serious trouble in the event of a divorce.
7. Apply homestead exemption
Homestead exemption is the protection afforded to homes of residents. It is a very powerful exemption that protects the value of a personal residence against creditors. Established in the statues or the constitution of most states, this statutory exemption can provide added protection to your asset in case of bankruptcy or creditor claim.