Entrepreneurship inherently involves risks.
Capital investment. Time commitment. Putting yourself “out there.”
However, forming a small business doesn’t involve risking everything. When your company faces challenges, you shouldn’t have to look over your shoulder and wonder whether courts and creditors are coming after your personal livelihood.
With this in mind, keep reading as we explore a few simple solutions small business owners can use to protect their personal assets from business difficulties!
Choose the Correct Business Structure
Business structure is the first place to start when it comes to protecting personal assets from business risks.
Sole proprietorships and basic partnerships are the most straightforward types of business structure. Unfortunately, they leave personal assets extremely vulnerable. In these basic business formations, there is virtually nothing preventing courts and creditors from coming after your private wealth to settle business debts.
This has led to the proliferation of LLCs in recent years. By making the business a separate legal entity from your personal estate, it keeps private assets insulated in the event of business turbulence. Despite their advantages over basic business structures, LLCs do have some drawbacks in terms of wealth management, such as:
- Increased IRS scrutiny
- Complex documentation requirements
- Annual fees and legal filings
- Difficulty in separating the business from personal estate in the event of a transfer
If these drawbacks are of specific concern to you, it is worthwhile to explore the benefits of a limited partnership (LP).
An LP is a surprisingly powerful business entity for asset protection. Limited partners can contribute to the business without any risk to their personal assets (beyond their investment). This makes it a great structure for family businesses. The main business owner (general partner) can assume the risk while friends and family members can contribute financially without jeopardizing their personal assets in the event of business difficulty.
LPs also offer a first-rate receptacle for present and future gifting. This can limit the taxable estate of the partners involved. They are also much more straightforward to form and have greater legal precedence than LLCs, making for more cut-and-dried decision making.
Explore a Domestic Asset Protection Trust (DAPT)
It is fairly common practice to include trusts as part of an asset protection plan. To this end, there are two main types of trusts:
- Revocable trust – assets can be moved in and out of this trust during the grantor’s lifetime. Upon death, assets in the trust are not subject to probate court. The downside is that revocable trust assets are not out of the reach or creditors or court rulings.
- Irrevocable trust – the trust becomes a separate legal entity from the grantor. Once assets are entered into an irrevocable trust, they are immune from probate court, creditors, and legal judgments. The drawback is that once assets are entered into an irrevocable trust, they are no longer accessible for the grantor.
Due to the inherent limitations of these common trust types, more and more business owners are exploring domestic asset protection trusts (DAPTs).
You may be wondering: what is a DAPT?
A DAPT is a special type of irrevocable trust in which the grantor can enjoy a degree of beneficial interest over trust assets while still retaining the legal inviolability of irrevocable trusts. This may even include periodic payments and interest distributions (at the discretion of the trustee). A DAPT is particularly beneficial for small business owners looking to protect their LLC as part of an estate plan and can be a great way to shield non-exempt personal assets from business creditors.
Although DAPTs can only be formed in specific states (Nevada and South Dakota are known for their favorable DAPT laws) you do not have to reside in the state in which the DAPT is formed. Consult an experienced estate planning attorney to see if this unique type of trust makes sense for your small business.
Maintain Adequate Insurance Coverage
When debts or legal claims exceed your business’ resources, something has to give. Even with the most bullet-proof personal asset protection, creditors will stop at nothing to find a gap or loophole. Cut the drama and shield yourself from accidents and professional mistakes by having comprehensive business insurance. Among the coverages to consider are:
- General liability insurance
- Commercial property insurance
- Professional liability insurance
- Product liability insurance (if you manufacture)
- Commercial auto coverage
If you have employees, ensure that you are compliant with worker’s compensation laws in your state. While paying insurance premiums can feel like an unnecessary expense in times of smooth sailing, it will pay for itself many times over–and keep your personal assets out of the equation–in the event of a crisis.
Protect Your Personal Assets from Business Turbulence with Proper Planning
Although being a business owner carries a certain level of risk, there is no reason to risk everything. Through proper due diligence and legal planning, you can effectively protect your personal nest egg from any financial claims your business may encounter. For more of the latest trends in entrepreneurship and small business, explore the content at Enterprise Podcast Network for additional insights!
Author Bio:
John Skabelund is a nationally recognized attorney at Ultimate Asset Protection with extensive experience in asset protection across the United States. His clients appreciate his ability to simplify complex topics, earning him a reputation for having the heart of a teacher.
People also read this: Workspace Options for Businesses That Aren’t Just Desk Jobs
