Incorporation, Protect Your Personal Assets

Version 4

    How To Protect Your Personal Assets When You Run A Business


    People who run their own business are responsible for liabilities they create.
    This means if your business cannot pay its debts, or if an accident hurts
    someone, you must pay. If you don't have enough money, then the people
    with a claim can try to take your home, car, stocks, bank accounts or other
    property to pay the debt. Because of this significant risk of losing personal assets
    arising from business claims, business owners try to take steps to reduce
    their risk of personal liability.

     

    An important way to avoid liabilities is to operate honestly, sell quality
    products and services, stand behind what you sell, protect the health and safety
    of customers and workers, and comply with all laws. Keeping these ideas first in
    mind will reduce claims and liability risks. But risks, claims and some
    liabilities still occur. Even a business that follows all the rules can face
    liabilities due to accidents, demanding customers, unreasonable suppliers or
    other events that could not have been foreseen. Additional steps can
    significantly reduce these
    risks. Here are tips.

    Put Your Business In A Separate Entity


    One of the best ways to protect your personal assets when running a business
    is to use a legally approved form of entity for your business
    that protects owners against personal liability.
    Today, this is commonly a corporation, limited liability company or limited
    partnership. An owner who follows the rules in using
    these entities and who does not engage in any personal misconduct normally is not
    personally responsible for the company's debts, obligations or liabilities (an
    exception is general partners of limited partnerships, who are personally liable
    for debts of the partnership).

     

    The basic rules are to set up the entity according to the law's
    procedures and to follow formalities the law requires to keep the entity
    in good standing. This means filing a certificate with the state, possibly having
    bylaws or an operating agreement, and a proper management structure. For
    corporations it may mean having shareholders and a board of directors that meets
    regularly. There are also certain documents that usually must be filed yearly at
    the state level.

    Keep The Entity Separate


    People with claims against a corporation or other
    limited liability entity sometimes try to break through to reach personal assets
    and money of the owners. Courts look at several factors when deciding whether to
    "pierce through" and force an owner to personally pay a company debt.

     

    Some factors a court looks at are whether the entity kept good records of its
    business, whether its property was kept separate from the owner's property,
    and whether the entity had a reasonable amount of assets to pay its debts.

     

    To help prevent your business entity from being "pierced," do not mix property
    of the business with your personal property. Also, as noted above, treat the
    separate entity with formality. And perhaps most importantly, make sure there is
    enough money or assets in the company to pay reasonably expected debts and
    expenses. Undercapitalizing an entity is one of the main reasons courts
    will "pierce through" and hold an owner personally liable for a company debt.

    Know Your Exposure


    Be aware of the potential for personal liability when you co-own a business. Many people form
    businesses with one or more other people. This is a simple form of
    business called a general partnership, but it has important legal ramifications.
    Each partner is an agent of every other partner, meaning one of your partners
    can bind you to a contract or other obligation even if you're not active in the
    business and don't consent to the action. If you want to protect your
    personal assets, don't operate your business as a general partnership.

    Don't Give Personal Guarantees


    Organizations you do business with will
    sometimes ask for personal guarantees. For example, if you are one of the
    principals of your corporation, when leasing office space a landlord may ask you
    to personally guarantee the lease. If you are seeking a business loan, the
    bank may require a personal guarantee or require you to pledge certain personal
    property as security for the loan. Be aware that if the corporation does
    not pay, you will be personally liable (or lose the property pledged), and the
    corporation or other entity will not shield you from this.

    Make Sure Your Contracts Protect You


    Personal liability can be limited or even eliminated by terms in your
    company's contracts or in your company's sales invoice and purchase order
    forms. These documents can say that you are not personally liable for
    matters arising from the contract (or limit the dollar amount of your
    liability), say that the other
    party to the contract waives claims, or even require the other party to the
    contract to "indemnify" you for goods or services it provides,
    which means help you defend a claim or even pay the liability for you. Our
    law firm can prepare language to put in your business documents to reduce
    the risk of personal liability.

    Obtain Liability Insurance


    One reason people try to pierce through an entity
    to get the owner's personal assets is that the business does not have enough
    money to pay the debt or liability. You can reduce this risk by putting enough
    money into the company, and also getting liability insurance. Depending how
    broad your insurance policy is, when you are sued the insurance company will
    help pay for or provide your legal defense. If you lose and the claim was
    covered, they'll pay the judgment.

    Other Methods


    There are other ways to protect your personal assets when you
    run a business, including transferring personal assets to your children or other
    beneficiaries, setting up a retirement plan that creditors can't reach, using certain kinds of trusts
    and using family limited partnerships to prevent creditors from reaching your
    personal assets. These strategies for protecting personal assets can be
    very complicated and have significant tax and legal consequences, so it is
    especially vital to seek legal assistance when considering them.

    Protecting personal assets from lawsuits and other claims is a key concern for
    most business owners. Our law firm can advise you on the best way to protect your
    personal assets to reduce the risk of losing them due to claims against your
    business.