Big corporations and those in high profile positions know to protect their assets. Unfortunately, small businesses don’t take the necessary steps to do the same. Find out how to protect your future from claims and lawsuits.
Business assets can be a collection of things. Anything your business owns, creates, or benefits from may qualify as an asset.
You may have a range of assets including cash and raw materials to office equipment and property. Many businesses own a combination of different assets.
Unfortunately, those assets are up for grabs if you ever get into litigation. Generally, people in high profile positions are adept at safeguarding their assets. Small businesses, however, sometimes overlook this important aspect.
It’s crucial to not overlook this essential safeguard. After all, if you lose certain critical assets, it could lead to your business going under.
So how does a small business protect its assets? Take a look at the tips below.
You don’t have to reinvent the wheel.
There are plenty of strategies and habits you can implement. These necessary steps can help to save you money, time, and heartache.
Ready to safeguard your future? Consider implementing these strategies and habits into your own asset protection plan:
Tip #1 – Creating the Correct Business Structure
Your first step is to structure your business properly. You have 4 business structures to choose from:
- sole trader
Most small businesses choose to operate as sole traders. This is the simplest one to set up.
However, as a sole trader you would operate under your own name. Typically, that means that you are also responsible for business debts. This may affect your assets if you don’t strategise properly.
Additionally, partnerships are an option if you enter into a business with two or more people. Unfortunately, like sole traders, partnerships are also responsible for any debts incurred by the business. And you’re liable for your partners’ actions.
A company structure, on the other hand, allows you to create a separate legal entity. This structure is a good idea for more ambitious businesses because of the limited liability to individual shareholders.
Company structures are also easier to scale and grow, which is why this structure is popular with startup businesses.
You may also run a business through a trust. But it may not be the ideal solution as far as asset protection is concerned because individual trustees are personally liable for the trust’s debts. Using a corporate trustee, though, may mitigate those risks and limit liability.
Tip #2 – Keep Business Assets and Personal Ones Separate
Do you know what a corporate veil is? It’s a separation between personal and business assets.
Ultimately, maintaining this separation can save you from financial ruins in the event of a lawsuit.
This separation can include:
- maintaining a separate business bank account and chequebook
- using the company name on all documents
- title the property in the company name, not your own
- maintain corporate records
- log the minutes of your annual meetings
Tip #3 – Start Planning Early
It’s never too early to start planning. If you only attempt asset protection planning after a claim comes up, it may make things worse. In fact, anything you do after a claim arises may be undone by “fraudulent transfer” law.
You may think that the judge unwinding a fraudulent transfer doesn’t sound so bad. But both the debtor and whoever assisted in the transfer may be liable for the creditor’s attorney fees.
Planning after the fact is like getting a flu shot after you already have the flu. The shot itself may make you feel worse. And the same goes for late asset planning.
Tip #4 – Understand Contract Liability and Always Read the Small Print
Do you understand contract liability laws? If you don’t, it’s going to be difficult to avoid risk.
With a proper strategy in place, you can avoid exceptions in tort and contract liability. This may make it possible to sidestep unlimited personal liability for business debts gone bad.
The right strategy can help preserve legal protection for owners. This would separate the owner’s personal assets from business liabilities.
In addition, acting negligently or fraudulently is one of the easiest ways for creditors to pierce a corporate veil. You’re still liable even if you didn’t realise it was happening at the time. And they can attack your personal assets.
You can protect yourself in different ways. This may include:
- proper lease agreements for your rentals
- using the company name for property and equipment titles
- use subcontractor agreements and contracts for every project
- don’t rely on emails for terms, especially in an important relationship
- don’t hire people to work under the table
Furthermore, be careful who you enlist to help you. Make sure they have the proper license or bond to protect yourself against future claims.
This can include:
- asset protection specialists
- legal advisors
- tax advisors
Remember to always read the fine print, too. It contains information that you agree to and are liable for.
Tip #5 – Be Careful When Placing Assets Up as Security on Loans
Should you place assets up as collateral for loans? It can help speed up the loan process. However, keep in mind that the lender also has the right to:
- take possession of the collateral assets
- sell them
- use the proceeds to pay off the loan
Of course, they’ll only do this if you stop making payments on the loan. Nevertheless, it is a risk you may have to weigh if you’re considering putting your assets up.
Also, keep in mind that the valuation of your assets will only be a fraction of its total value. And if for any reason your assets lose value? You’ll have to put up more for security.
Tip #6 – Control Instead of Own
One of the biggest secrets of the rich is that they don’t own assets in their name. That’s right. If they do, the court can take the assets in a lawsuit or bankruptcy.
Instead, put them in a family trust or company. If you do, you can control it via trust.
This way, if the business gets sued you don’t technically own the asset. You only control it.
The trick is to look penniless on paper. Maintain control, but avoid outright ownership as much as possible.
Tip #7 – Obtain Appropriate Insurance
It’s always a good idea to buy insurance. In fact, it should be an essential in your startup budget.
The right insurance gives you the ability to take care of incidents in your business. But it can also give plaintiffs something else to target other than your assets.
However, you need the right insurance for your situation. For example, you can get different insurances depending on your business. The different types can include:
- rental properties
- professional practices
- retail stores
The one that you may want to consider is umbrella insurance. You can get this for personal or business use, but it functions the same way. This insurance serves as an umbrella over all other types of insurance you may have.
The annual cost is relatively inexpensive in comparison to the monetary coverage.
However, it isn’t necessarily protection for every instance. Generally, this type of insurance doesn’t cover criminal, fraudulent, negligent, or reckless actions.
Insurance is not a substitute for asset protection planning. But it does serve as a great supplement if there’s ever a claim against you.
Tip #8 – Consider Using a Trust
Are you considering a trust? It’s protected from personal claims and a popular asset protection technique. Remember, though, that trusts are for personal and not business assets.
If you do decide to put personal assets into a business entity, the risk of corporate veil piercing by a creditor or other entity goes up.
However, do keep in mind that selling personal assets into a trust may trigger capital gains tax and stamp duty. You may also need to refinance if a title changes and a debt’s involved.
Tip #9 – Get Help from Someone Who Understands the System
Are you required to develop asset protection strategies on your own? No. You can always enlist a professional to help.
There’s no shame in not understanding the system. It’s a good idea to get well acquainted with it. However, if you’re unsure you can always enlist the help of a professional.
Typically, if someone wants to sue you, they’ll look in the asset register. If your name is not on it because you don’t own any assets, they usually go away.
In addition, if they see loans and mortgages and other situations, that may also make your asset unattractive.
Why would you want your assets to look unattractive?
Creditors want an easy win. But they’ll think twice about going after someone who has assets tangled in bank loans.
Someone who knows the system can advise you further on how the system works. It’s not enough to know how to play the game. You also have to know the rules to come up with an effective strategy.
Tip #10 – Hold Long-Term Assets in a Super
If you buy assets that you want for the long term, holding them in a self-managed super fund is an option. They’re usually protected in a lawsuit. However, you can’t use them until retirement.
The government protects assets in an SMSF because they’d rather not have to pay your age pension. So protecting you for your retirement is a good way to keep assets safe.
In fact, many people buy property through an SMSF. They do it at a 75% lend. But you do need to think carefully before doing it.
Tip #11 – Go Overseas
It’s possible to move or buy assets overseas. And generally, a creditor would have to go overseas and get a court order to touch those assets.
The likelihood of someone obtaining a court order is slim because they’re generally very costly.
Major corporations like Facebook, Google, and Amazon take advantage of this. They hold their assets in one country and control in another. They may also trade with customers through yet another country.
Going overseas can protect your assets and save on taxes. However, this may not be practical for small business owners. But it is good news for owners who do business internationally.
How protected are your assets in the event of a claim or lawsuit? You need an effective asset protection strategy to make sure that your business life doesn’t bleed into your personal.
One of the first defences of any good strategy is setting up the right business structure. Setting up a limited company is a good way to create a corporate veil and separate your business and personal assets.
When you do create your separate business entity, it’s important to maintain it. In addition, you should also know your way around contract liability so you aren’t taken by the fine print.
Also, don’t forget your business insurance. There are many different types available beyond liability, so make sure to adequately protect your business. But the right insurance can serve as a buffer between a claim and your assets.
Finally, it’s important that you understand the system. The rich play this game very well. And they know the ins and outs of how it works.
If you don’t understand the system or need additional consulting, it’s okay to ask for help. Just make sure that the professional you seek advice from is properly licensed to avoid future liability issues.
Do you need more information on asset protection? Maybe you could use some pointers on setting up your business? Contact one of the experts at Coral Horizon for more information – it’d be our pleasure to assist you.