If you run your own business, you need an asset protection plan. This article provides an overview of why you need to a plan and what factors go into creating and implementing your plan.
Every business owner needs a comprehensive asset protection plan because owning and operating a business can be risky. For example, businesses may default on open accounts with vendors, or default on mortgages or other secured loans from banks. Further, many of these debts may be personally guaranteed by the owners. Potentially, owners or employees may commit negligent acts while carrying out company activities.
Moreover, consumers may bring claims for injuries suffered due to the sale of defective products, or claims based on unfair and deceptive business practices, which could produce a financial settlement. Also, claims by employees, such as wrongful discharge and sexual harassment, are on the rise. These risks could bring about financial disaster for business owners, resulting in the loss of both business and personal assets.
A comprehensive asset protection plan, based on the principles explained in this section, can prevent or significantly reduce these risks, and insulate business and personal assets from the claims of creditors.
Unfortunately, many small business owners are unaware of these principles, or simply misunderstand them. However, it needn't be this way. Nicholas C. Misenti and the editors of the Business Owner's Toolkit® have compiled a set of strategies and helpful advice that, when executed well in advance of any trouble, helps eliminate the need for a guardian angel to bail you out of any worst-case scenario.
These asset protection planning strategies are equally available to debtors and creditors alike, and wise entrepreneurs should engage in these strategies, no matter which side of the relationship they are on. But for the purposes of explanation, the discussion that follows is told from the debtor's point-of-view.
Armed with knowledge of asset protection strategies, small businesses truly should be able to compete on that same "level playing field" with their more well-heeled and more powerful counterparts, resulting in a better chance of success and a lesser chance of financial ruin, if things go terribly wrong.
In order to limit exposure to events that could cost a company its assets or close it down completely, many small business owners form a corporation or limited liability company (LLC), hoping to protect the owners' personal assets outside of their businesses.
While this is a good first step, many business owners are unaware that significant exceptions exist to this limited liability. And when an exception applies, personal liability is imposed on the owners, despite the fact that a corporation or LLC exists. Accordingly, the owners' homes, cars, personal bank accounts, investment portfolios, etc., are all subject to the claims of business creditors. With knowledge and planning, however, these exceptions can be avoided, and thus limited liability preserved.
Beyond avoiding these exceptions, much more should be done to protect personal and business wealth. For example, most business owners mistakenly believe that assets within a corporation or LLC are automatically shielded from liability. However, most business owners face the greatest risk of liability from business transactions, and not personal dealings. Therefore, the business entity's assets, which can be significant in a successful operation, are exposed to the greatest risk of loss. Yet, a corporation or LLC can be structured, funded and operated so that the business's assets are not exposed to liability.
In addition to structuring and operating your business to protect your assets, a wise individual engages in federal and state asset exemption planning. This exemption planning, which places personal and business assets into protected categories and thus out of the reach of creditors. As a result, even in a worst-case scenario (e.g., a judgment in a major lawsuit or a bankruptcy filing), there will be limited or no loss of assets.
Exemption planning is a very important part of an asset protection plan. In fact, in some cases, it may shield the majority of your assets. However, once serious financial problems arise, it's often too late to transfer unprotected assets into exempt categories. The planning must be done beforehand, or you run the risk of having your transfers treated as ineffective or even fraudulent by the courts.
Your exempt assets can usually include a residence; pension plans; wages; annuities; and various categories of personal property, including household goods, tools of the trade, and motor vehicles, among other things. Many categories of exempt assets have dollar caps. Moreover, the exemptions and the caps vary widely from state to state.
This multi-layered approach to asset protection offers redundant protection. One strategy alone may be sufficient to prevent loss. Taken together, however, they can present an insurmountable barrier to creditors. Today, it is entirely possible to protect all of the business owner's personal and business assets, even in the worst of financial circumstances.
Timing is critical in asset exemption planning. Ideally, you should do your planning before your business is formed. Nevertheless, an owner of a thriving business also is an ideal candidate for effective exemption planning. Significant wealth can be protected before any serious problems develop.
The poorest candidate for exemption planning is the small business owner who is already in the midst of a financial crisis. Even here, however, steps can be taken, albeit very cautiously, to protect assets. In this situation especially, you should seek the guidance of a professional advisor before undertaking any planning steps.