4 Strategies a Business Owner Can Adopt for Asset Protection
This article is provided by Phil Bradford, content writer and enthusiast.
Risk is an integral part of any business. You will have to take risks if you want to do business. It can be of any type; right from debt obligations to product or professional liability. And one of the biggest risks that you might face in your business is when you get sued if anything goes wrong. If you can’t mitigate these risks properly, it can lead to a loss of your business or personal assets.
That’s why you need an asset protection plan especially if you have significant assets. It can help you protect your assets from the claim of potential creditors. Here are some of the best possible ways a business owner can plan for asset protection.
1. Opt for the right business structure
If you are the sole proprietor of your business, you are personally liable for any debts incurred. That means if your business can’t meet the financial obligations, the creditors can file a lawsuit against you. Thereby, you can lose some or all of your personal assets for repayment of debts. So, it’s important to change the legal status of your company to shield your assets. Here are some of the feasible options:
A limited partnership is made up of two or more partners in a business. Being a limited partner, you will have limited liability up to the amount of your investment.
Corporations can help you to protect your assets by separating your business and personal assets. A corporation is set up under state law and it is a separate legal entity from your personal assets. So, if the corporation is subjected to corporate debt, you are not personally liable for it.
Limited Liability Corporations (LLC) is also a separate legal entity like a corporation. The members of the LLC have limited liability and are not personally liable for any debts or liabilities. And LLCs don’t have rigid restrictions like corporations.
2. Create an asset protection trust (APT)
An asset protection trust can help you to keep your assets away from the creditors. It offers the best protection from lawsuits and judgments too. You can find two types of asset protection trusts, i.e, revocable, and irrevocable.
In the revocable APT, being the settlor, you will be able to retain full control and ownership of the assets of the trust. That means you can change the terms of the trust or remove any assets from it. Eventually, revocable APTs don’t offer full asset protection. Because if the creditors win a judgment, the court can order the payout of trust assets for settling the claim.
On the other hand, irrevocable APTs cannot be changed or modified. And unlike revocable APTs, the assets will be under the control of a trustee. So, if a lawsuit is filed against you, those accounts will be untouched as they won’t be considered as yours. And that makes an irrevocable APT a better choice for business owners for their asset protection planning.
Now irrevocable APTs are of two types namely:
Domestic APTs: You can create domestic APTs in 17 states (Alaska, Nevada, Hawaii, Michigan, Mississippi, Missouri, New Hampshire, Delaware, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, Virginia, West Virginia, South Dakota, and Wyoming) in our country.
The only drawback of domestic APTs is all your assets will come under the US legal system. So, your assets will still remain vulnerable to the lawsuit or claim filed against you by the creditor.
Foreign APTs: These APTs are also known as offshore trusts as they are held in an offshore account. Foreign APTs are created outside the jurisdiction of the US which makes it more costly than domestic APTs.
But your assets will be governed by foreign laws, so foreign APTs offer better protection. However, while establishing a foreign APT, you need to decide wisely since your assets will be exposed to economic and political risks in the jurisdiction where the trust account is created.
3. Separate your business accounts from personal ones
One of the mistakes many business owners make is not segregating their business accounts from their personal ones. So, try to refrain from using your personal credit cards for business requirements or using your business credit cards for making personal purchases. Besides, keep the account where you deposit the revenue of your business separate. Don’t use that account for personal purposes. Let me show you an example.
Suppose you have taken out a few payday loans; and as a part of the loan agreement, you have provided ACH authorization to your payday lenders for debiting funds from your business account.
In case if you fail to repay the payday loans (pdls) on time, the lenders might sue you in court. And if the judgment goes against you, the court can direct your lenders for wage garnishment to pay off your debts. In that case, you can lose a huge chunk of your business revenue since you provided ACH authorization for that account.
So, if you are debt-trapped with pdls, you can opt for settling payday loan debts and get rid of the situation with ease. But to stay away from this mess, it’s always better to make your business accounts separate from your personal ones and protect your assets.
4. Opt for umbrella coverage
Having proper insurance coverage for your business is very important to protect your assets. The coverage type and costs usually depend on the business you own. It can protect you or your business if a creditor files a claim in court. And I believe, being a business owner, you have adequate insurance coverage. But you can increase your coverage by opting for umbrella insurance. For about $250 to $500 a year, you can get around $1million to $2 million in umbrella coverage apart from your personal or business insurance coverage.
So, the bottom line is, asset protection planning plays an important role to gain financial success and grow your business. Hopefully, the above 4 ways can help you to plan for asset protection. But since some of the asset protection strategies depend on the state laws, you can seek professional guidance, if needed.
Author Bio: Phil Bradford is a financial content writer and an enthusiast. He has expert knowledge about personal finance issues. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.