Asset Protection for Business Owners: What You Need to Know

Business owners often learn quickly that they face more challenges than they originally anticipated in the planning stage. Various financial and legal risks can set a startup back drastically unless you apply the right risk management strategies. Choosing a business insurance plan that matches your company's needs will help you build a safety net for your asset protection.

When you launch a startup, you need to purchase business insurance to shield your assets from litigation. Carrying sufficient liability insurance will pay for lawsuits and settlements so that no one can come after your cash or property. In addition, depending on how you structure your company, you can protect your assets from creditors.

Claims on Assets

The two types of claims on assets that creditors can file are internal and external claims. Internal claims limit the creditor to holdings of the business entity. External claims allow creditors to seek both company and personal assets. Therefore, it is essential to understand the potential for these claims so you can prevent your property from being seized by a creditor.

Asset Types

The two main types of assets are safe and dangerous. Safe assets reflect financial instruments such as stocks and bonds or savings. Risky assets include commercial property, business equipment, and company vehicles. These assets are considered dangerous because they create safety and financial risks affecting their value.

Asset-Protection Strategies

The business structure you decide for your organization is closely associated with protecting your assets. For example, a Limited Liability Corporation (LLC) shields your personal assets from exposure to company debt. Here are ways different business structures protect or don't protect personal assets:

• Corporations - Shareholders of stock are the legal owners of the company. Shareholders have voting power to elect the board of directors who oversee company management. Corporate officers have limited liability and no personal liability for debt or injuries on the firm's property. A creditor cannot seize the personal assets of officers, directors, or shareholders.
• S Corporations - This type of corporation qualifies for a special IRS tax election for profits to pass through the corporation and be taxed only at the shareholder level. Shareholders enjoy the same protections on their personal assets as regular corporate leaders and investors.
• Limited Liability Corporations - These firms get the same protections as a regulator corporation and tax structure as an S Corporation. The main difference is that an LLC faces fewer regulations and formal processes.
• General Partnership - Two or more individuals going into business together form a general partnership based on a written or oral agreement. This type of business structure provides the highest risk because each partner is liable for debts, including those created by one of the partners. In addition, it encompasses unlimited liability, meaning you can be responsible for your partner's negligence.
• Limited Partnership - This arrangement involves one or more general partners and limited partners. An individual can play the role of both a general and limited partner as long as there's one other partner. A general partner who oversees management has unlimited personal liability.
• Trusts - A trust agreement between a trustor who creates the trust and a trustee who manages the related assets. The trustor transfers assets to the trustee, who makes them available to beneficiaries upon the trustor's death. While a revocable trust allows the trustor to amend the trust, an irrevocable trust does not provide these rights.

Best Asset-Protection Vehicles

The best asset protection vehicle is an LLC if you run a small business. It provides the most convenience and flexibility with no risk of personal asset exposure. LLCs must meet state requirements, which vary among the states. Certain professionals such as physicians, dentists, and attorneys cannot reduce liabilities from the LLC or corporate structure. However, they may still use these structures and invest in the right insurance plan to safeguard against litigation.

When a business cannot offer personal asset protection, consider moving assets into a family limited partnership (FLP) or trust. The LLC structure can be precious to individuals with a high net worth.

Picking a General Partnership

Be aware that entering a general partnership puts you at risk of being responsible for your partner's actions. So, if your partner runs up substantial debt while you're not looking and then disappears, you'll be the one facing creditors. In addition, it will open the door to you getting sued by someone who can end up draining your personal assets. Doing business with a partner who creates massive financial losses for another party can lead to the plaintiff trying to seize your personal property.

Ask yourself why you've even thought about a general partnership. Is it because you're the talent with skills while the partner is the investor or business expert? You are better off forming an LLC than a general partnership due to lower personal risks. However, even if you do everything by the book, you can still face high individual costs if your partner participates in nefarious activities. It helps to talk with an attorney before committing to any business structure.

No matter what type of business structure and model you set up, your assets can be protected with the right insurance coverage. The best way to assess your asset protection is to discuss your holdings with a business insurance expert. Then, contact us at Little & Sons Insurance Services and tell us about your insurance needs. We'll help you customize a solid insurance plan to protect your assets.