Protecting Your Assets As An Entrepreneur

Protecting Your Assets As An Entrepreneur

After taking the time to launch a new business and gain traction, the last thing entrepreneurs want to do is to lose their personal assets. Protecting your assets as an entrepreneur is essential to sustaining your business in the long term, as well as your personal financial stability. Fortunately, there are ways that you can protect your business and personal assets.

Choose the Business Entity Carefully

The first step of asset protection for entrepreneurs is to select the right business entity. There are many options for establishing a business entity.

Sole Proprietor

Operating as a sole proprietor is typically the easiest type of business to structure. However, there are no asset protection benefits for this type of structure. The personal assets of the business owner are completely exposed in the event of a lawsuit. If a business owner fails to set up a separate entity, the business will be treated as a sole proprietor.

General Partnership

A general partnership is similar to a sole proprietorship in that there is unlimited personal liability for the owner. However, general partnerships consist of two or more people who operate the business together. Each partner is liable for all of the partnership’s debts, including those debts that other partners incur on the business’s behalf. A general partner can act on the other partners’ behalf without their knowledge or consent.

Limited Partnership

A limited partnership can provide some asset protection for an entrepreneur. A limited partnership consists of at least one general partner (as described above) and one limited partner. The limited partner has no personal liability for the debts or liabilities of the partnership beyond what they contributed to the partnership. The general partner is responsible for the day-to-day functions of the business.

Limited Liability Company

A limited liability company is a separate entity recognized by the Internal Revenue Service. An LLC provides liability protection to the owners of the business so that only the business assets can be sought by creditors or litigants. Its owners are known as “members.”

Corporation

Corporations are owned by shareholders who own stock in the corporation. Shareholders elect a board of directors to manage the corporation. The directors elect officers, such as the president, secretary, and treasurer, who take care of the day-to-day functions of the business.

Corporations benefit from asset protection due to their limited liability. Corporate officers, directors, and shareholders are not liable for debts of the corporation or for the wrong acts of employees or agents of the corporation. If a creditor has a claim against the corporation, it generally cannot reach the personal assets of the officers, directors, or shareholders. Instead, the creditor is limited to the corporation’s assets to satisfy their claim.

There are several types of corporations, including C corporations and S corporations. C corporations pay taxes on their business income. Additionally, business owners pay taxes on the income they receive as an owner or employee on their personal tax returns. S corporations qualify for a special Internal Revenue Service tax election that allows them to have their corporation profits pass through the business so that they are only taxed at the shareholder level. There are special rules regarding the types of stock the company can issue to shareholders, the number and type of shareholders, and how profits and losses must be allocated among shareholders to form an S corporation.

A knowledgeable attorney at the Jennifer V. Abelaj Law Firm can discuss your objectives, the structure of your business, asset protection advantages, and tax processes involved with many types of business entities.

Keep Assets Separate

After selecting the proper business structure, it is important to maintain the business as a distinct legal identity. This is easiest to do by keeping personal and business assets separate. Business owners can establish separate bank accounts and credit lines in the name of their business. Also, they may wish to avoid providing a “personal guarantee” when taking on debt in the company’s name, which works to extinguish the personal liability protection a corporate structure provides.

If the business owner owns more than one business, they should also keep these businesses separate and have separate accounts for each of them. Taking these measures can insulate the other businesses in case one business lands in financial trouble.

Purchase Insurance

Asset protection for entrepreneurs is also possible through the purchase of insurance. Businesses may benefit from a variety of insurance products, such as:

• General liability insurance – Covers losses that arise out of the business’ operations
• Professional liability insurance – Covers professionals such as accountants, engineers, and architects from claims based on their negligence
• Property insurance – Covers real property or personal property that is damaged, lost, or stolen
• Employment practices liability insurance – Covers legal costs that arise out of a business’ employment practices, whether or not the business wins the underlying legal case
• Business interruption insurance – Replaces business income that is lost because of a disaster
• Cybersecurity insurance – Covers losses caused by data breaches, ransomware attacks, or other cyber-attacks
• Umbrella insurance – Provides extra liability coverage if a loss exceeds the limits of other insurance policies

Use Trusts Strategically

Another way of protecting your assets as an entrepreneur is to use trusts strategically. Business owners can set up a trust so that it owns the business with the help of an irrevocable asset protection trust. With this type of trust, you receive maximum protection from creditors because you do not have control over the property or distributions. Since the entrepreneur is not the legal owner of the business, creditors or litigants cannot reach the entrepreneur’s personal assets.

Contact Us for Help with Protecting Your Assets as an Entrepreneur

If you would like more information about asset protection for entrepreneurs, the knowledgeable attorneys at the Jennifer V. Abelaj Law Firm can help. We offer customized estate planning and business succession planning services. You can learn more about our services and how we can help by calling 212-328-9568.