Many business owners know that incorporating or forming a limited liability company (LLC) can help shield them from legal liability. But those same business owners probably haven't addressed other common asset-protection issues that can affect their businesses as well as personal assets. As your business and your overall wealth grow, new and different asset-protection questions arise. The following tips can help you.
Fortify Your Business And Personal Financial Position
As you face asset-protection issues, focus on the objective of not only maximizing wealth but protecting it as well:
Buy liability insurance. Don't fall into a false sense of security. The limited liability protection of a separate entity doesn't preclude the need for liability insurance, both for the business and for you individually. You need individual umbrella coverage to protect yourself against claims that allow a "piercing of the corporate veil." Carefully establish amounts and types of liability coverage for your business designed to its particular needs and asset value, as well as coverage for your assets outside the business.
Separate your assets
You wouldn't operate the business without a separate entity, so don't tie up all your assets inside your business, unless you must. Investments, or even excessive cash, lose any protection as long as the company owns them. Therefore, distribute non-vital business assets to the owners, at least in an S corporation, LLC or partnership. In a C corporation, beware of payments that could be considered dividends and create a second level of tax, such as those that are above and beyond normal salaries. Having all your eggs in one basket could be almost as bad as having no basket at all.
Find a balance
It isn't always easy to balance the business's cash needs with your longer-term personal financial goals. But decisions concerning this balance can make or break your business -- and your personal financial statement. Growing and successful companies typically need funding. You may indeed benefit from keeping as much as possible of your available assets in the business to reduce its borrowing or capital needs. You could also lend money back when the business needs it.
Be careful, though
Consider your personal financial needs and your ability to protect your assets from your business's creditors. This is precisely why you created a separate entity for your business in the first place. You must decide whether the risks and your tolerance for them dictate that you seek out other financing or equity investment instead.
Buy life insurance
It's obvious you need to protect your business and family with adequate life insurance. And proper types and amounts of insurance can guard your family against being forced to sell the business to pay potential estate taxes. But don't stop your planning there. Keep in mind that, after your death, your family could suffer devastating economic hardship from lost business income. Adequate life insurance may help in many ways -- for instance, by:
Go The Distance
- Providing other owners or key employees funding to buy out your family's interest,
- Heading off a cash crisis that might otherwise lead to a quick sale of the business at a steep discount, and
- Giving the business the time and funding needed to make adjustments and return it to profitability.
You and your family deserve the same consideration as your business. Don't let the spotlight shine too long on your business -- protect your personal assets as well:
Consider joint tenancy. To shield your home from the reach of your business or personal creditors, consider shifting ownership to your spouse. Or, alternatively, shift to tenancy by the entirety in states where it is an option. Under this particular form of joint tenancy, the surviving joint tenant still automatically gets the house on death of the other joint tenant, but your home is protected from creditors as long as the surviving spouse continues to live there. Normal joint tenancy doesn't offer the same protection.
Hold assets in separate entities
By putting real estate or investment assets into a limited partnership, you can protect these assets to some degree from potential creditors. Even though creditors can take partnership interests, they will not be able to convert their investment to cash. Or consider establishing an Alaska, Delaware or offshore trust to protect your investment assets from creditors. Assets that others give you (such as gifts or inheritances) can more easily be protected through locally established trusts that will hold the interest being transferred to you as beneficiary.
Qualified retirement plans, including individual retirement accounts and 401(k) plans, offer significant benefits. Contribute as much as you and your business can afford up to the legal limits. You'll obtain income tax benefits while at the same time providing a safer place to house some of your investment funds. Generally, creditors can't reach either corporate or individual qualified plans. Prohibited transaction rules will also protect you from yourself, because they won't allow you to use qualified plan money to lend to or invest in your business ventures.
Running a business requires hard work. The same is true for protecting your personal and business assets. Devise an asset-protection plan today and continue to review it as your business grows and develops.