A start-up business owner can protect his or her personal assets by buying sufficient liability insurance and reducing the amount of cash in the business. He or she can also use appropriate contracts and procedures as well as capitalize on the asset exceptions offered by the law in his or her state. These tried and proven strategies can help the business owner protect his or her personal assets from claims filed against the business by trade vendors, bank lenders, the landlord, or even personal injury claimants.
Personal Asset Protection Strategies
Purchasing Sufficient Liability Insurance
Buying sufficient liability insurance is an effective way of protecting assets because it acts as the first line of defense in case of a lawsuit. The business owner should purchase insurance that covers the typical risks that his or her specific kind of business faces. If he or she is running an advertising business, the coverage that shields it from defamation and copyright lawsuits would be a perfect choice.
The business owner needs to discuss with a competent insurance agent regarding the specific insurance he or she requires and the amount of coverage he or she should have. On top of that, the business owner should also understand that insurance won’t cover the business from every potential risk. He or she should also keep in mind that insurance may not cover certain types of claims, such as a sexual harassment claim.
Reducing the Amount of Cash in the Business
A start-up business owner shouldn’t keep more cash in his or her business than is necessary. Instead, he or she should have just enough to finance the daily operations of the business. The simple reason is that if a lawsuit against the business is successful, the plaintiff may go after the cash. Moreover, once a lawsuit is threatened, expected, or already filed, transferring the cash out of the business would be illegal. In simple terms, “hiding” cash that isn’t already protected from the plaintiff is classified as a fraudulent transfer.
Using Appropriate Contracts and Procedures
If a business owner is negligent or fraudulent, creditors are likely to penetrate the corporate veil and target his or her personal assets. He or she can avoid this by having quality business contracts and procedures in place. For starters, this involves developing sound lease agreements for the rentals, ensuring property and equipment titles are under the company name, and making sure every project has subcontractor agreements and contracts. It also involves hiring qualified, licensed, and insured professionals.
Capitalize on Available Exemptions
Exempt assets vary from state to state. Depending on the business owner’s state, exempt assets may include retirement accounts, insurance products, such as annuities and life insurance, with some restrictions, and a fraction of the homestead value. Some states, such as Texas and Florida, classify the full homestead value as an exempt asset. In nearly all other states, the amount of the exemption is extremely small. Putting some of the available money in exempt assets could, therefore, be an effective strategy for protecting personal assets. Working closely with a business or estate planning attorney when investing cash in exempt assets is, however, a wise decision.