As an entrepreneur business owner, you are probably aware that running and owning a business is fraught with risks. Most people would want to protect their company from lawsuits and claims.
Consumer protection concerns, claims for damages caused by your employees, and mortgage and debt obligations to vendors and third parties are just a few of the risks you must manage. If not managed properly, these risks can result in the loss of personal and business assets. Knowing them and how to avoid or mitigate them gives you the best chance of running a successful business.
Forming a limited company is a good place to start when you want to protect assets from being claimed to satisfy legal obligations and offset debts for your business. But do you know how to maximize the protection of your LLC assets? Worry not! Keep reading to discover effective strategies that can be the difference between getting your assets taken away and retaining them!
1. Evaluate trust options for asset protection.
Putting your stocks, cash, house, and other valuables into irrevocable trusts can be instrumental in helping you to protect your assets from LLC legal obligations and debts. An independent trustee administers an irrevocable trust for the benefit of your named beneficiaries, e.g., your children. Some states will also require these trusts to include spendthrift clauses prohibiting asset transfers before distributions to intended beneficiaries. While you will lose control of these assets, these trust vehicles will benefit your designated beneficiaries in the future because they are usually protected from creditors.
Self-settled trusts or Domestic Asset Protection Trusts (DAPTs) are recognized in a few states and allow people to choose themselves as beneficiaries, retain control over trust assets, and remain protected from creditors.
2. Have separate LLC accounts.
Use these key tips for your LLC account management.
– You can keep your personal or business finances separate by not depositing any of the LLC’s income into your personal bank accounts.
– Create a separate LLC business account from your personal account at a credit union or bank.
– Create an LLC savings account – It is a separate bank account from your business account and should be held at a different financial institution than your personal accounts.
– Don’t mix assets – By keeping them separate, you’ll be able to access your other savings and property, even if one account is garnished or frozen.
– Transfer your assets – A creditor must first sue you and obtain a court judgment before taking your investments, savings, or home to pay the debt. If you move your assets before filing a lawsuit, a creditor may be unable to locate your savings and will have to spend more searching for them.
3. Choose corporate status for your limited liability company.
Consider incorporating your company as an LLC. The IRS lets LLCs choose whether to be taxed like a sole proprietorship or a corporation. If you meet certain requirements, you can choose to operate as an S Corporation or a C Corporation using IRS Form 8832. As a corporation, your LLC will face more complex filing, reporting, and meeting requirements, as well as double taxation.
However, by incorporating your LLC, you can help protect your personal assets from LLC debt and liabilities and liability for unpaid LLC payroll and additional taxes.
4. Put your profits toward specific assets.
If your business is profitable, you should consider putting your money into certain accounts that are often protected from creditors or a primary residence. Many states permit residents to claim a homestead exemption on their primary residence in the state up to a certain monetary limit. Florida is especially generous, shielding primary residences from debts in total, even if the purchase was made to prevent creditor liability. Under applicable laws, tax-qualified retirement plans such as 529 college savings plans for grandchildren or children, the cash value of life insurance policies, and IRAs are also usually protected from LLC debts to varying degrees.
5. Purchase sufficient insurance coverage.
Nobody wants to be in an accident or make a professional mistake, but it happens in business. Every individual and business should assess their situation and seek adequate liability and professional insurance to protect personal and business assets. You should seek advice from professional or industry associations on the appropriate forms and levels of insurance. Identifying any potential policy exclusions from insurance coverage is also vital.
Final Thoughts
As an entrepreneur or business owner, you now know that LLCs can protect your business and personal assets under the right circumstances. However, there are many techniques with varying effectiveness depending on your LLC type. Consulting with an attorney regarding the best type of LLC, the most effective asset protection strategies, and the best way of structuring your business is extremely important. Visit a trusted resource to see a checklist of more proven asset protection best practices.
