How To: Personal Asset Protection
Personal asset protection is an important idea, especially when you own, manage or lead a business in today’s litigious society.
Unfortunately, no one thing can protect you or your business perfectly under all circumstances. Therefore, it’s important to implement a number of steps to give you coverage to help protect against a variety of circumstances that could befall your business.
Asset protection doesn’t just mean protecting wealth you’ve already accumulated. It also means:
1. Protecting your existing business from some sort of calamity, and
2. Preventing a calamity from causing long-term financial stress or bankruptcy.
Step #1: Incorporate if you’re not yet incorporated
There are many ways to conduct business in the United States. The two most popular are sole-proprietorship/partnership and incorporating. Sole-proprietorship is where one person simply does business, and reports income on Schedule C. Partnership is where two or more people are simply doing business, reporting their respective incomes on Schedule C. This form of business is really no business at all – the individuals are the business, and the moment such an individual dies or becomes incapacitated, the business dies or becomes incapacitated. Worse, if the business hurts someone, it’s as though the individual hurt someone – and the person or people comprising the sole-proprietorship or partnership can become personally liable.
This is worse than it sounds. There are all sorts of reasons such business leaders can become personally liable, even they didn’t do anything wrong. One example is the law of agency: any individual performing activity on behalf of the business can potentially makes the business responsible for the actions of that individual. So, if an employee or contractor performing work on behalf of such a business hurts someone else, that someone else can go after the sole-proprietor or the partners of a partnership.
As another example, suppose your bookkeeper gives wrong advice about paying taxes and the sole proprietor / partnership uses that advice for years? You guessed it: The sole-proprietor or partners comprising the partnership can be personally responsible, even years later and even if they are no longer conducting business.
Incorporating is the flip-side of sole-proprietorship / partnership, where the company is conducting business and the company gets in trouble for harms caused to third-parties. The two most popular forms of such companies are “corporations” and limited liability companies (or LLC’s). Note that “S-Corporations” can actually refer to either corporations or LLC’s, and depend on how they are taxed. If your accountant suggested an S-Corporation, be sure to seek clarification on whether your accountant is suggesting either “a Corporation taxed as a S-Corporation,” or “a LLC taxed under Subchapter S”.
Operating as a Corporation or LLC provides a number of significant benefits, the primary one being liability protection of the owners.
If there is any opportunity for harassment or privacy concerns for the owners, consider forming an Anonymous LLC to help ensure asset protection for your business.
Step #2: Obtain the right type and amount of business insurance
Most importantly, make sure you have the right business insurance for your company.
At a minimum, this means Workman’s Comp and General Liability (GL). Depending on the size of your company (i.e. in employees and/or revenue) and what products or services your company sells and where/how it sells such products or services, you may need additional forms of insurance, including cyber, professional liability, casualty and more.
The importance of the right business insurance cannot be understated. Too often, we find business leaders who acquired insurance from an inexperienced broker or a friend-of-a-friend, potentially years ago, not realizing they’ve made a critical error by:
- Not having the right coverage, or the policy they’ve been paying for actually excludes the types of activities their business conducts; or
- Over-insuring themselves, by paying too much for too much coverage – either because they just don’t need the amounts covered under the policy, or because they have other insurance plans that duplicate coverage; or
- Underinsuring themselves, by paying too little for too little coverage – similarly to over-insuring, you can easily underinsure by not paying for the right amount that needs to be covered under the policy, or by having gaps in coverage between different policies.
This is why we’ve partnered with Insurance 4 Small Business. They are willing to talk with policyholders to help ensure you have the coverage needed. Give them a call, if you think you need help in this area.
Step #3: Make sure you have contracts for all third-party relationships
The importance of a good contract for EVERYONE your company comes into contact with cannot be understated.
Clients/customers, vendors and employees/contractors should all have strong contracts that govern who is responsible for what, how payment is made, who is liable for what, how warranties work (if any), how disputes are resolved, and much more. A strong contract can GREATLY REDUCE potential liability, and most liability will occur from third-parties your company comes into regular contact with.
Step #4: Consult with specialists to make sure all bases are covered to ensure effective asset protection
Don’t forget that most business leaders cannot be expert at everything. There are many things that can spell trouble or disaster for a company, including not getting taxes correct, paying employees properly, and much, much more.
Therefore, take some time to talk with the right specialists to make sure you’re doing things correctly. These specialists should include, at a minimum:
- HR Specialist to help make sure you have the right policies and procedures in place, so you don’t give an Employee or Contractor an opportunity to file a complaint or otherwise sue the company.
- A CPA or Accountant, to make sure you’re properly accounting for all taxes, and reporting properly.
- A Business Attorney, to make sure you have the right contracts and legal compliance issues dealt with as appropriate.
- A Business Insurance Broker, to make sure you have the right insurance and coverages in place (even if you think you have insurance, you may not have the right coverages, and may be either underinsured or paying too much because you’re over insured).
In Summary, Good Asset Protection Requires a Number of Steps
No one thing above is perfect. To operate a company effectively in today’s society, it’s necessary to use all the above techniques and methods. Don’t risk your company, your livelihood and your personal assets by cheating on any of the above suggestions.
Ready to speak with an Attorney? Contact us or give us a call at 505.715.5700