How best to protect your personal assets? Here are a few things to consider.
o Separate your Personal and Business Assets
If you don’t protect your own assets from your business assets, you could get in trouble. If you operate your business in a sole proprietorship form or as a general partnership, the business is not a registered entity, which means your personal assets are not separate from your business assets.
For example, if you are a sole proprietor and an angry customer sues you, any assets you own such as a house or car will not be protected. Financial assets like your bank account don’t either. These can all be taken if the decision is found against you.
Or maybe you’ve formed a two-person partnership with your friend. This is probably an even worse idea than a sole proprietorship. That is, you are just as responsible for your friend’s mistakes as you are for your own. You are also responsible for anything purchased on behalf of your partnership. Remember that one spouse’s signature is sufficient to bind both spouses to a debt or other type of obligation. Again, this leaves you unprotected and with no recourse should something happen; You can be left holding the bag.
To protect yourself, use a registered company entity, such as a C or S corporation, limited liability company, or limited partnership. You should keep your company registration up-to-date, hold annual meetings and keep annual minutes, separate business clients from yourself, and avoid signing any business-related documentation on your behalf. This keeps your own assets separate from your business assets. In the same way, you are also protected from debt or disaster caused by your business.
o Protect Your Business Assets
You need to protect your business and real estate assets from yourself. A limited liability company is a great way to help protect key assets. For example, if you own a rental property, you must own the assets in a limited partnership or in an LLC. This protects you from personal liability if something happens to the property and also gives you another advantage. If someone gets injured on your property, you are protected from direct prosecution by the tenant. Remember that business assets are still at risk of lawsuits should the lessee decide to sue. However, if you have adequate insurance, you can help protect yourself against a claimant claiming your assets to meet your obligations. This strategy comes with a caveat.
A comprehensive commercial insurance policy can help you maintain your property instead of ending it as part of a court-ordered settlement. what should you look for? Liability insurance must cover injury to third parties on your property. It should cover a violation, especially if you own undeveloped or vacant land. If you have people working on your property as employees, you must also have Workers’ Compensation insurance. Insurance should also include an additional “construction cost increase” if your building is damaged or requires reconstruction. That means you’ll be covered at today’s construction prices, not past years’ prices. If you are a landlord, a “lost rent” rider can help you recover costs if your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it is being rebuilt to offset any actual losses. A final consideration is “higher limit” riders, so you have extra protection in the event of a catastrophic claim being filed in one of these categories.
But as we know, insurance companies have an economic incentive not to cover every claim. They find excuses to refuse coverage. So even if you have insurance, you will use the entity as a second line of defense to protect your personal assets from your business claims.