If you’re thinking about starting a business, you should know there are some situations in which your personal assets may be at risk. If you have significant personal property, including but not limited to a home, cash savings, or ownership of assets like stocks and bonds, those holdings could be in jeopardy if you’re held personally liable for a legal issue, or if you’re personally attached to a loan.
Fortunately, with the help of asset protection strategies, you can shield your property from these potential risks. So what steps can you take to protect your personal assets when starting a business?
Separate the business
The first and potentially most important thing you can do to protect your personal assets is to create a business entity that’s separate from you, personally. There are several types of business entities you can create, each with their own advantages and disadvantages.
For example, if you start a sole proprietorship or a partnership, you’ll have the benefit of simplified paperwork and straightforward structuring — but you’ll also be personally attached to the business, meaning you could be held personally liable for any business debts or legal issues.
Instead, you may want to create a limited liability company (LLC), a corporation, or a related business entity. These types of structures are treated as separate entities from a legal standpoint; they can take on loans and debts of their own, and can be named as independent agents in a lawsuit.
A separate business entity won’t protect you from everything. For example, if you commit a crime while working as a leader within a corporation or LLC, you could still be held personally liable for certain damages. However, separating your business entity can go a long way for protecting your personal assets.
We can help you create an LLC or a corporation with our business formation services.
Avoid taking personal loans
It’s also advisable to avoid taking out personal loans for your business, whenever possible. Some business owners are tempted to fund the business by maxing out their credit cards and taking on personal debt — especially if your business is struggling to get funding or a loan of its own.
However, it’s usually much better to be patient and develop the business’s finances independently. Otherwise, if the business goes under and you’ve failed to pay off your loans, you’ll still be responsible for paying back all the money you borrowed. If you can’t pay back the money, the lending institution could go after your other assets, like your vehicle or home.
Use common sense
Try to use common sense when operating within your business. Obey the law consistently, and if the law is ambiguous or you don’t know what’s allowed or not allowed, talk to a lawyer. Hire and trust experts in every area of your business to increase your protection, and don’t rely on verbal contracts. Instead, try to get everything in writing, and make sure you’re working with a legal expert who can double-check your work at every stage of early business development.
You can also protect yourself by insuring the business. There are several types of insurance policies that can protect your business, depending on how you operate and what your needs are. For example, if you manufacture a specific product to distribute to your customers, you’ll want to have a product liability insurance policy in place.
If you’re especially concerned about your personal property, you could purchase an umbrella insurance policy. Umbrella insurance is a form of additional liability insurance that protects you beyond the limits of conventional policies (like homeowner insurance or auto insurance). If you’re ever personally sued for damages, or if you face other legal issues or risks, your umbrella insurance policy may kick in. Note that you must have “first-level” insurance policies, like a homeowner insurance policy, in place before you can get an umbrella insurance policy.
Make use of retirement accounts and other exemptions
In many cases, your retirement accounts will be protected automatically. For example, under federal law, ERISA-qualified retirement plans have unlimited asset protection, and IRA holdings are protected up to $1 million, even in the event of bankruptcy. There may be limitations on what you can contribute to these accounts, and when, but this protection is quite useful.
Depending on your circumstances, you may have other possible exemptions available to you; for example, in many states, you’ll have significant protection for home equity. Make sure you understand the laws in your state.
There’s no way to completely protect your assets from every possibility, but the more strategies and tactics you adopt, the safer your personal property will become. Hopefully, your business will never put your personal assets in danger, but it’s always better to have protection strategies in place before you really need them.
Anna Johansson is the founder and CEO of Johansson Consulting where she works with businesses to create marketing and PR campaigns.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.