You’ve heard it before: the best offense is a good defense. No matter what kind of business you run or how small it may be, you need to plan defensively. A major part of preparing to conduct business is protecting yourself from liability and possible financial ruin. This is especially true when you’re a one-person operation whose assets are mostly personal.
Even the smallest business faces many problems that can potentially lead to being sued: accidents, contract disputes, careless employees or partners, divorce, major economic changes, employment law disputes, malpractice or negligence claims, nonpayment of loans or defaults on leases or mortgages, intellectual property claims, tax issues, and even personal liabilities can all threaten your business. And although the right business structure and insurance are both essential, they alone cannot adequately protect your business and personal assets in all cases.
So what kind of steps can you take to protect your assets?
- Plan ahead with the specifics of your business shaping the plan.
Asset protection planning is definitely not one-size-fits-all, especially for businesses. Obviously if your business is particularly vulnerable you may need to plan more carefully. Which businesses are most at risk? According to G Kent Mangelson, CFP, a senior advisor with the American Society for Asset Protection:
“America is a very litigious society. If you have any assets you need to protect them from being taken by a lawsuit. However, the most sued professions are doctors, business owners, and those who own real estate.”
- Take inventory regularly and thoroughly.
Every six to twelve months you should create a complete list of your debts and assets. When you do, be inclusive. Include anything of value that you own from stock to retirement money to real property.
- Never wait until you “need” to protect assets.
Asset Protection is prophylactic, not curative. It’s not meant to save you from paying back creditors you already have; it is designed to take as much of your wealth off the table as possible before anyone is looking. If you wait too long, not only will you be unable to protect your assets, but any attempt to move around money and property may be interpreted as fraudulent. Mangelson adds, “We provide the education and tools needed to become less vulnerable to lawsuits, but that only works before they’re filed.”
- Don’t give anyone “your word.”
Personal guarantees that you will personally take responsibility for debts are damaging to your business. Some small business bank loans require this kind of guarantee, and if you have to make one work with an expert to limit its effect. But never do business with another company or supplier who wants this kind of guarantee.
- Asset protection is about choosing multiple strategies that work well together and preparing for the unknown.
There is typically no one right answer to the question, “How can I keep all of my assets untouchable?” Different experts are likely to suggest different tactics. When choosing the right tactics for you, consider both the experience and reputation of your expert as well as your overall comfort level with the tone of their planning.
- Take special care with contracts.
Your company’s business structure will probably not provide enough protection for your business in a tort case or criminal claim such as a fraud case. Whenever you can, sign only limited contracts that disallow different kinds of damages or at least cap them. And when you sign, sign on behalf of your business, not yourself.
- Choose strategies and experts with your location in mind.
Most issues in asset protection arise from state law which varies considerably. In fact, even the extent to which insurance can protect your assets from specific threats varies by state. For example, some states like Nevada and Delaware are considered more friendly to businesses than to creditors; other states either protect insurance proceeds from creditors (like Florida) or open them up to creditors for the most part (like California).
- Look for protective exemptions and entities in your area.
Along the lines of the last tip, carefully research which of your assets could be exempt under state or federal law in a creditor action. Exempt property can stay in your name, but anything else should be protected.
The bottom line
Don’t be an easy target. If you carefully plan ahead for the worst case scenario, you will avoid predatory lawyers and others looking to drain your assets. And remember, this is a complicated area. Seek the advice of a professional.