Sometimes, when starting a new business, the boundaries between personal and business lives are so blurred it is hard to separate the two.
However, it is always important for you, as a company owner, to keep your personal and business assets separate.
Asset protection is about protecting your personal wealth from the threat of business liabilities, which can be a real danger to both you and your business. This aspect is often overlooked by small business owners who are unaware of the potential risks that can harm their business, so in this post we’ll give you some tips for being properly protected.
Why is it important to protect your personal assets?
The goal of asset protection is to prevent or reduce risk by insulating your business and personal assets from the claims of creditors.
If you don’t properly protect your assets, which you worked long and hard to accumulate, they can be lost very quickly in a lawsuit, bankruptcy, or if creditors come to collect.
Tips for protecting your personal assets
There are different strategies to be followed for protecting your personal assets in business. But here are the most important tips that will ensure protection:
- Choose the right business structure.
When you’re starting out, one of the most important decisions you have to make is to choose the right business structure for your business. This decision can affect company growth, the amount of tax paid, the extent of liability owed, the legal requirements needed and the amount of paperwork. The business structure you choose will depend on what is best for you and your business.
The simplest option may seem operating as a sole proprietorship but in terms of asset protection, this is not the best choice. As a sole trader, you run your own business as an individual. You can keep all your business’ profits after you’ve paid tax on them but you are also personally responsible for any losses incurred by the business. Your personal assets are completely exposed to a potential lawsuit.
Therefore, if you want to protect your personal assets, you should choose a structure that offers you limited liability. Setting up an entity, such as a limited liability company (LLC), is an important step in the development of your business and protection of your assets.
- Keep personal and business finances separate.
You need to maintain a separate bank account and checkbook for your business; use the company name on all documents; title the property in the name of the company and maintain corporate records and log the minutes at your annual meeting.
- Use proper contracts and procedures.
Even if you have limited liability, one of the easiest ways for creditors to “pierce the corporate veil” (to ignore the separation between business and personal assets) is if you act negligently or fraudulently. For example, if you use the company as a sham.
This can be avoided by having your contracts in good order and being compliant with your legal obligations. Legal and tax advisors can be really helpful in this area.
Additionally, having a series of documents that define your relationship, and limit your liability, with all relevant stakeholders can be key for protecting your personal assets.
- Purchase appropriate business insurance.
Insurance gives you the ability to take care of an incident in your business and should be included in your budget as an important part of it.
Depending on your business type, different types of insurance are required so make sure you get the correct insurance policy. Carefully review your policy and pay particular attention to any special conditions and exclusions.
If you have any query about protecting your personal assets or you need legal advice for your business, book a call with our legal team. We’ll answer all queries you may have and provide guidance through every stage of your legal needs.