Owning a business can be a highly rewarding and profitable venture if handled correctly, but it also comes with risks. In the increasingly litigious society that we live in, businesses are faced with more claims and lawsuits than ever before. As a business owner, it is your responsibility to understand the many risks which face your business and personal assets, and take the necessary steps to protect them.
In this article we will outline the importance of asset protection and some of the best asset protection strategies that can be used.
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Businesses face a variety of potential risks in the forms of legal disputes, bankruptcy, creditor claims, employee negligence, and so on. Some of these risks are obvious, but many are not widely known, or overlooked.
Having a comprehensive asset protection plan in place is vital to ensure the continued longevity and success of your business, and protect both the business and you from the risk of losing your valuable assets.
These strategies employ various financial vehicles and tools to effectively safeguard you from risk. It is of utmost importance that a comprehensive asset protection plan is established before you are faced with a lawsuit or other issue, as it is much more difficult to protect your assets in retrospect.
There are two main types of claims that may be made against your assets through the course of running a business, and the main distinction lies in whether these claims are against only your business assets or extend to your personal assets too. The two types of claims are categorised as:
It is important to understand the different types of claims that can be made against your business and personal assets and how such claims might arise, so as to be able to adequately plan and protect yourself.
There are multiple tools and strategies you can use to protect both your personal and business assets. It is usually better to employ various strategies alongside each other so as to have a wholistic and integrated strategy that can protect you from various types of risks.
The exact tools and techniques which are best for you will of course depend on your own circumstances, type of business, financial capacity, and objectives. Here are some of the most widely used and effective tools and strategies:
The most important feature of a business asset protection plan is to establish complete legal separation between your personal and business assets. This means that you should elect to establish a business entity which offers limited liability protection.
The two most popular choices are a corporation or limited liability company (LLC). Corporations are best suited to larger businesses with many shareholders, while LLCs are generally preferred by smaller business owners.
Both of these business types are seen as separate legal entities, which means that claims cannot be made against the owner’s personal assets in order to settle an obligation of the business itself, except in exceptional circumstances.
Other types of businesses which serve the purpose of protecting your personal assets include S Corporations, General Partnerships, and Limited Partnerships.
Trusts are a highly effective asset protection device when used in conjunction with a limited liability company or corporation. The ownership of the LLC or corporation can be transferred to an irrevocable asset protection trust, with you naming yourself as manager of the LLC.
This allows you to maintain control over the assets in the LLC and the day-to-day business activities without having direct ownership. This creates a multi-layered asset protection strategy which creates even greater separation between your personal assets and those of the business.
A title holding trust works in a similar way to an asset protection trust, except instead of the trust owning the entire LLC, the title deeds of specific pieces of valuable business property are transferred to a title holding trust (e.g., business equipment or real estate).
You will remain the beneficiary of the trust, while designating a trustee to hold the title of the property in the trust. You as the beneficiary effectively remain in control over the assets as you can manage the trustee to act on your behalf.
This obviously creates additional layers of legal protection as well as the element of privacy, as your personal name is not recorded in association with ownership of the property, but rather the name of the trust itself appears on the title deed.
In addition to the aforementioned financial tools that can be used to better protect business assets, there are also some important tips to take note of to maximise the protection of business assets:
This has already been mentioned but cannot be stressed enough. In order for an asset protection strategy to really be effective, it needs to be in place long before a claim arises.
The earlier the better. Once a claim against the assets arises, it is often too late to adequately protect your business or personal assets. Assess the risks you might face and put in place the necessary structures today to protect your assets. It is also important to regularly reassess your asset protection strategy and make any necessary changes as your business evolves over time.
Intellectual property theft is rife in this technological age. The IP of a business is often more valuable than its tangible assets, and needs to be safeguarded as such.
Registering your business’ IP will not only protect it from being stolen by others, but will also protect the business from an IP theft claim being made against it. Sometimes IP theft may occur without even being aware of it, so going through the process of registering trademarks and copyrights will help you to discern whether all the IP you have created is indeed original and not already owned by someone else.
If you operate the type of business where the data has significant value, it is important to make sure there are proper internal procedures in place, including confidentiality agreements, to stop your employees from leaking potentially valuable data.
Insurance is the most obvious, yet one of the most effective tools in protecting business assets.
Many neglect to ensure that their businesses are adequately insured against all possible risks, but investing in good insurance can be the primary layer of protection your business needs.
Operating a business today may be fraught with risks, but there are sound and effective tools which business owners can utilise to protect both their personal and business assets. It is important to educate yourself about all the potential threats to your business assets, and take the necessary steps today to implement a wholistic asset protection plan.
Due to the complexity of the many strategies and tools available, it is best to consult with an asset protection expert who can help you implement the ideal strategy to suit the specific needs of you and your business.
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