Asset Protection for Small-Business Owners: How to Secure Your Future and Minimize Risks

Managing a business goes beyond making profits; it also requires that you give some thought to protecting your business and personal property in the event of a legal claim. Liabilities can range from unpaid debts to judgments stemming from the actions of your employees, and any of these could cause financial loses for your business, yourself, or both. Careful planning can help you to minimize these risks

The Importance of Safeguarding Your Assets

Having an asset protection plan can help to shield your personal assets and the assets of your business from being lost to a legal judgment. An asset protection plan involves a variety of legal strategies, starting with the way that you structure and form your business. The end goal is to keep your finances safe and protect your business from catastrophic losses in the event of a liability lawsuit. The importance of having an asset protection plan can't be overstated, and the sooner you put yours into place, the better it will be able to protect you.

Differentiating Between Internal and External Asset Claims

As a business owner, you may face two different types of claims to your assets: internal and external claims. The difference between these lies in whether you can be held personally liable for the financial losses in question. An internal claim is one that can only be made against your business. For example, if someone trips and falls at your office and is injured, their claim would be against the business. But an external claim can go beyond the business to put your own personal finances at risk. For example, if you cause a car accident while driving a company vehicle and the other driver is injured, they can sue both the business (the owner of the vehicle) and you as an individual.

Categories of Assets

Some assets naturally carry with them a higher amount of potential liability than others. Generally, business assets can be categorized as "dangerous" or "safe" based on this fact. For example, a building, a vehicle, or a piece of equipment can all be dangerous assets, as someone could possibly be harmed while they're in use. On the other hand, an asset like a bank account or a share of stock is a safe asset. Ideally, you should separate ownership of these types of assets as much as possible. Otherwise, a claim against one dangerous asset can expose other assets to losses, too.

Strategies for Protecting Your Assets

Some of the most common legal methods of shielding business and personal assets from risk involve the formation of corporations, partnerships, and trusts.

Corporations

Corporations are a type of legal business structure. A corporation is a business owned by its shareholders and run by one or more directors. Generally, a corporation provides liability protection for its owner(s), shielding their personal assets from the business's debts. However, it's important to keep the business operating as a completely separate legal entity from its owners, with its own separate assets. Failure to do so can expose your personal assets to risk.

C Corporations: The most common type of corporation is called a C corporation. In a C corporation, profits are taxed twice; the business is taxed on its profits, and then shareholders are taxed on the dividends they receive.
S Corporations: An S corporation affords the same level of liability protection to shareholders as a C corporation, but profits are only taxed as dividends, avoiding double taxation. However, S corporations are subject to a few restrictions that C corporations don't have, including a limit on the number of shareholders your business can have.
Limited Liability Corporations (LLCs): An LLC has both the tax benefits of an S corporation and the liability protections of other corporations, and it also offers greater flexibility for business owners. LLCs can be directly managed by their owners, and they can be owned by any number of parties, including individuals, companies, and/or other LLCs.

Partnerships: General vs. Limited

A partnership is a type of business structure offers much less asset protection than a corporation, with the amount of exposure to risk depending in part on the type of partnership it is. A general partnership involves two or more people running a business together, but all of the partners are personally liable for all of the business's debts; in the event of a catastrophic financial liability, there's no protection for business or personal assets. A limited partnership involves both general partners and limited partners, and the limited partners do not have personal liability for business debts; however, they also have much less control over how the business is managed. That means that a limited partnership can offer some asset protection, but only for the personal assets of the limited partners.

Trusts

Trusts are legal agreements in which assets are held and managed on behalf of another party. You can use a trust for asset protection by transferring ownership of the business assets to a trust, to be managed by a trustee. An irrevocable trust, which you cannot change or dissolve once it's set up, can provide strong asset protection by clearly separating your personal assets from the business.

Optimal Vehicles for Asset Protection

The right asset protection strategy for a particular business owner will vary depending on their specific set of circumstances. In many cases, a corporation will be the right choice, as it offers a good balance of asset protection while letting you retain control over the business. Forming an LLC is a particularly good choice, providing a good amount of protection as well as more flexibility and lower setup costs. However, certain types of professionals, like doctors and dentists, typically can't fully take advantage of the protections of an LLC, as they are personal service providers, to whom different liability laws can apply. In these situations, it can be a good idea to protect your personal assets by putting them into a trust, an LLC, or a limited partnership, which may help to shield some of your assets if you face legal action.

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