Entrepreneurs should never wait for drastic times to take drastic measures. Legal and, ultimately, financial risks are the vulnerability of businesses in recent times. Some measures are best taken to ensure the protection of assets in the event of a lawsuit. Taking these measures, although won’t guarantee immunity to risks, but will most definitely give you the needed protection.
Let’s look at eight crucial tips to protect your personal and business assets.
Tip #1: Go for the right business entity
Business entities like a sole proprietorship and limited liability company( LLC ) are options for entrepreneurs. Both are indeed beneficial; however, running sole proprietorship business exposes an owner’s asset to risk. An LLC business owner is required to run a separate personal account from the business account. Running a business as an LLC protects personal assets. When a company is in debt or facing a lawsuit, the personal assets of the owner and employers remain unaffected. The business’s account will bear the entire weight of the fine or repayment.
The first step or perhaps the best way to plan ahead of any lawsuit likely to affect assets is to get the right business entity
Tip #2: Adhere to your entity regulations
Businesses registered as LLC must keep a designated bank account separate from a personal account. The fact that a business is LLC doesn’t automatically exempt a personal account. If the accounts are not separated, personal accounts will be affected. All cooperate documents, reports, property, and records should carry the business name.
Tip #3: Have a proper Insurance
Insurance is essential to every startup. It’s a guard rail that prevents the fall of business when a legal issue arises. Insurance policy varies depending on the business type; purchasing insurance corresponding to asset types being protected is crucial for full protection.
Settlements in a lawsuit can be costly, and litigants aim to dig deep in pockets. However, the insurance company will help cover legal fees and settlements.
Tip #4: Purchase a backup umbrella insurance
Backup insurance is necessary as a fallback for other insurance. Backup insurance can be done for business and also personally. Both ways, this insurance type covers other insurances of an entrepreneur. A $300 yearly pay gives about $1 million protection. As fantastic as this may sound, there are rules to it. Back up insurance doesn’t cover criminal or fraudulent acts in the business. Additionally, it won’t be responsible for any reckless or negligent attitude. An entrepreneur is mandated to play by the rules to enjoy the benefits and also protect the business from legal problems.
Tip #5: Let your spouse keep it
A good strategy could be to transfer some assets to your spouse. Usually, a spouse with a high-risk business plays safe by placing assets in the name of the partner susceptible to lower risk. A prenuptial arrangement functions as an excellent cover to protect assets in spouse name when litigants come hunting. Although utilizing this method can impact on assets division in the event of a divorce, the arrangement veils assets and keeps them out of the reach of creditors. However, this strategy is not beneficial when both mates run businesses with high exposure to risk. Additionally, both partners can be at risk if a joint loan is taken, the strategy won’t work in this instance.
Tip #6: Homestead Exemption
A homestead exemption is a legal protection rule that protects an entrepreneur’s assets. Homestead exemption value differs for each state or region. It protects a primary place of residence from creditors, but some amount of cash can also be exempted.
For example, if a homestead exemption in a region is $300,000 and the home values at $200,000, the owner gets to keep the house and up to $100,000 personal cash. But in cases where the home value exceeds the authorized exemption limit, litigants or creditors can force the sale of a home. Similar to the first example, let’s say the exemption limit is $300,000 and home values at $500,000. A sale can be forced while the owners get to keep the homestead exemption proportion.
In some regions, the homestead is not valued monetarily. The exemption is by acres of land, and in this instance, only a primary residence is considered not external property at other places. While homestead exemption is applicable by default in some areas, an entrepreneur may need to file for it in some regions to enjoy its benefits and potential shield in the lawsuit.
Tip #7: Implement tenancy by the entirety
Tenancy by the entirety protects assets from creditors. Married couples with a spouse running a high-risk business use it as a strategic step to protect property during a lawsuit. The property or, as in most cases, houses or real estate carrying the tenancy by the entirety. It means that couples are mutually entitled to the property and, therefore, can not be sold to settle legal battles or as a repayment. An entrepreneur should ensure the binding law in the region as this may only apply to real estate property in some regions. In some situations where a couple is jointly in debt, tenancy by the entirety is null and void. Of course, the law will decide if the property gets to be divided or goes to a spouse during a divorce.
Tip #8: Create a trust
Creating an irrevocable trust is an ideal way to shield assets from lawsuits. Trust allows some assets to be placed legally in the care of independent trustees making such assets untouchable for most creditors. The protection of an entrepreneur’s asset in assets protection trust can be expensive, but it’s very much worth the cost.
Conclusively, to avoid bankruptcy, asset protection strategies are essential for every entrepreneur. Note, however, that as necessary as the steps outlined above are, getting an excellent legal adviser will make a world of difference. Importantly also, proper records of transactions and documentation matter a lot when running a business. Above all, every entrepreneur’s magic wand to minimize or avoid legal troubles is to endeavor to adhere to the rules and regulations serving as a guideline for each unique business type.