Business has always been surrounded by risk. If you’re a business owner or manager, you understand that turning a profit, as necessary as that is, is not the only facet that involves risk. You’ll also have to make sure you protect your business and yourself from claims and lawsuits.
There are debt obligations to third parties, damages caused by your business and staff, and product or professional liabilities. These risks can potentially lead to the loss of business and personal assets if not dealt with carefully.
Learning how to protect yourself from these risks is a good starting position when conducting business.
Asset Protection
The idea is to insulate your business and personal assets from creditor claims. Even small companies are at risk here, although many small business owners don’t understand their options well.
Asset protection uses legal tactics to protect your assets even before lawsuits or claims arise. If done right, asset protection can deter the seizure of assets in case of a judgment. The earlier you put this plan in place, the stronger it will hold up against such risks.
Strategies for asset protection include creating separate legal entities like corporations, trusts, and partnerships. The most effective strategies consider the kinds of assets the business owner has and the creditor types who are likely to go after them.
Internal versus External Claims
Internal claims are limited to the assets of the business. If you have a corporation, for example, and someone was injured in the land owned by said corporation, they may be limited to go after the corporation’s assets instead of yours.
External claims, on the other hand, can include personal assets.
Corporations
Corporations, according to Investopedia, are a form of business organization that divides its ownership among shareholders. Corporations are an appealing tool for protecting assets because corporate principals have no personal liability for the debts of the corporation. A creditor can only go after corporate assets in their claims.
General Partnership
A general partnership involves two or more people in business together. It’s less effective as corporations when it comes to protecting assets because any partner can act on behalf of the others. Personal assets of all the partners are also accessible to claimants to debts of the partnership. All partners are liable in contracts that other partners have entered in.
Limited Partnership
While the general partners have the responsibility to manage the business, limited partners don’t have the same control. In return, the limited partners are not personally responsible for the debts and obligations of the partnership beyond their contributions.
International Asset Protection
International asset protection is a legitimate way of diversifying one’s wealth to institutions outside the country. It is an effective way of separating assets from risk.
Trusts
A trust is an agreement between a grantor and a trustee. The former transfers assets to the latter for the benefit of a beneficiary. Irrevocable trusts are powerful asset protection tools because the grantor no longer controls the assets. That means these assets are no longer part of the conversation when debts and obligations are settled.
Running a business is already challenging and surrounded by risk. Learn how to separate your assets from risk so you can focus on growing your business with peace of mind. Get legal counsel on which of these options is the best for you and your business.
