When starting out a new business, one of the most important things to consider is how to protect your personal assets from corporate liability. Without the proper protections, your own assets, such as a house or a retirement fund, may be subject to the claims of your business creditors or any legal judgments against your business. In order to reduce the risk of this happening, there are several asset protection strategies that every business owner should consider.
The most fundamental step you can take toward asset protection is to structure your business as a limited liability company so that your assets are protected from business creditors. This could take the form of a limited liability corporation (LLC) or a limited liability partnership (LLP), among other options. By doing so, you formalize your business as a separate legal entity that is distinct from you, as the owner, and this prevents you from being personally liable for the company’s debts or legal liabilities.
While registering as an LLC or LLP can be an important first move toward protecting your assets, it is not foolproof. There are numerous state and federal exceptions to limited liability that can allow owners to be held personally responsible for debts or payments made by their businesses. For instance, if you engage in conduct on behalf of the corporation that is harmful to others, you may be held personally liable for the consequences of such actions. When you sign financial documents for your business in your personal capacity, such as with a business loan, your personal assets may become subject to creditors upon failure to repay such a loan. In order to minimize these risks, there are certain actions that you should take in addition to formation of your LLC.
After you have formed a limited liability business, there are certain rules that you should abide by in order to maximize the asset protection of your business structure. First and foremost, it is important to keep personal and business assets separate and distinct. This is because courts have often found that business owners who create an independent legal structure for their business, but do not treat their business as independent of their personal finances, are not entitled to limited liability protection. This is known as the “alter ego” theory. If you treat your business as an “alter ego” for yourself, rather than as a separate and distinct entity, you may lose the protective advantages of your corporate status and become personally liable for your business’ debts.
In addition, business owners may also wish to increase their asset protection by purchasing insurance to cover against unexpected accidents, mistakes, or claims by third-party individuals. Liability and professional insurance can help insulate your personal assets from protection in the event that you are subject to claims based on an exception to general limited liability.
Finally, in addition to structuring your business in a way that maximizes asset protection, you may also wish to increase protection of your personal assets by placing them in investment vehicles or trusts that provide protection from creditors or legal claims. For instance, you can place certain assets in managed trusts that are administered for the benefit of beneficiaries, but no longer controlled by you as the owner. In exchanging for relinquishing your control over these assets, you can also ensure that the assets are protected from creditors and kept for the benefit of your designated beneficiaries.
