One of the most misunderstood concepts is how to be a business owner and protect your personal wealth at the same time. Many business owners are taken advantage of with high-priced asset protection plans that don’t provide the protection they promise. Others avoid the topic, crossing their fingers that an expensive lawsuit or accident doesn’t befall them.
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. If, for example, a customer is to slip and break an arm in your store, do you have strategies in place to avoid personal liability that can cost you your assets and even your home?
Here are four ways to ensure your personal wealth is protected in the event that your business is held accountable for something gone wrong:
1. Choose the right entity for your business
While operating as a sole proprietorship may seem like the simplest option when you’re just starting out, it certainly isn’t your best choice when you’re talking about protecting your personal wealth from business liabilities.
As a sole proprietorship your personal assets like your home, investments and personal property are completely exposed to a potential lawsuit. Setting up an entity, such as a corporation or limited liability company will better protect you in the event of a lawsuit.
2. Keep work and personal finances separate
It’s important to maintain a separate account for your business, use the company name on all documents, title the property in the name of the company if necessary, and most importantly, maintain a corporate book and do your annual minutes.
Don’t think you can cut corners, you should have all the proper documents for any type of entity and do your annual maintenance religiously by paying the required fees to the state, holding your meetings and keeping minutes.
3. Have proof that you’re a stand-up business owner
One of the easiest ways for creditors of your business to attack your personal assets is for you to act negligently or fraudulently. Be able to show you follow procedures and document them. Should an incident land up in court, these are the things a judge wants to hear when considering whether to go after a business owner’s personal wealth.
4. Purchase the proper insurance
Beware if any so called ‘asset protection’ company suggests you can avoid insurance by simply hiding your wealth or setting up an entity. Insurance is an important part of your business and should be budgeted for from the start. It gives whoever is after your money a target to pursue and can take care of an incident in your business.
That said, make sure you get the correct insurance policy. Depending on whether you own a rental property, professional practice, or retail store, you are going to need very different types of insurance. Don’t forget to have an annual review with an insurance agent who can advise you on your options and the policies you may need.