Starting and running a successful business — especially in the beginning — can overwhelm your personal life. You have to devote a lot of time and energy to the business. Still, it’s important to maintain a wall between your personal and business life, both for your mental health and your financial future. This process includes learning how to protect personal assets from business lawsuits and losses.
You must take proactive steps to protect your personal assets. Several asset protection strategies can limit your personal liability as the business grows and operates. This article will walk you through those strategies to help you make a more informed decision as you look to the future.
Understanding the Risks
Without the right protections for your personal assets, you could be liable for business errors. The ideal option is to reduce risk by using the right business structure that creates a separate business entity from your personal life.
Personal Liability
If you don’t take steps to protect personal assets from business lawsuits, your personal assets could be at risk from any business missteps. Lawsuits can devastate personal wealth if you aren’t using the right business structure because you’ve left those assets open to external threats.
Without protections in place, for example, your personal assets could be subject to liens or seizure if you default on a business loan.
Business Structure and Liability
When choosing the business structure you want to use, pay particular attention to the protections it gives your personal assets.
Additionally, you need to follow the required operational business protocols. If using a business structure that requires the business owner to keep finances separate, the owner must adhere to these rules. If the owner treats the business assets as personal assets, a court may call this piercing the corporate veil, which reduces or negates some of the liability protections.
Essential Steps To Protect Personal Assets
You need to follow certain legal steps to learn how to protect personal assets from business problems and lawsuits. Here are the most fundamental ones to consider:
Separate Business and Personal Finances
Protecting your personal assets starts with separating the business from your personal life and assets. You can set up a business structure that helps with this. Additionally, you should avoid taking out loans for the business you secure with personal assets. Don’t use a personal credit card for the business, either.
Choose the Right Business Structure
Although some business structures, such as sole proprietorships, are easier to operate, they don’t offer the same level of protection for personal assets as other structures.
Typically, adopting a corporate structure provides significant levels of protection. Such structures include:
- Limited liability companies (LLCs)
- Limited partnerships
- S corps
- C corps
Unlike sole proprietorships and general partnerships, the corporation structures fully separate business and personal assets and liabilities.
Formalities and Compliance
Simply setting up a corporation isn’t going to ensure the desired separation, though. You must follow the protocols that govern the use of corporate structure for your business.
For example, if you choose a limited partnership but the partners actively and regularly manage the business, they violate the rules. Should someone sue the business, a judge may rule that the partners’ violations mean the business operates as a general partnership. This ruling could jeopardize the personal finances of the owners.
Insurance Coverage
You may already have property insurance for the company. However, figuring out how to protect personal assets from business losses may involve purchasing liability types of business insurance on top of any policies you already have.
Business Liability Insurance
The primary business liability insurance you should consider is general liability insurance. This coverage protects the business from things like the cost of lawsuits or someone suffering bodily injury on business property.
If you do not have the proper business structure in place, general liability insurance for the business might not protect your personal assets. It helps to educate yourself about what your current policy does and does not cover.
Professional Liability Insurance (Errors and Omissions)
Professional liability insurance is vital for businesses that provide professional services. Also called errors and omissions (E&O) insurance, this coverage protects the business from lawsuits originating in the following:
- Claims of negligent actions from you
- Oversights in the work you do
- Inadequate quality of work
- Giving advice that harms your client
- Failure to complete the expected services
Professional liability insurance covers legal costs for trials, settlements outside of court, and financial judgments against you that occur in court.
Asset Protection Planning
As you determine how to protect your personal assets from business lawsuits and losses, an asset protection trust lawyer can provide key advice for creating a plan. You and your attorney can employ several different techniques in your asset protection plan.
Entity Sheltering
If you must operate a business structure that doesn’t adequately protect your personal assets, you could shelter some of them in an entity. For example, you might be able to use a structure like a family limited partnership (FLP) to protect the assets from someone suing the business.
Asset Allocation
To protect your personal assets from business operations, it’s important to always keep the assets separate. Allocate your business assets separately from your personal assets by:
- Using separate bank accounts
- Applying for credit and loans for the business without using personal assets as collateral
- Track receipts and expenses separately
Trusts and Other Legal Structures
Another option to consider is using a trust to safeguard your personal assets. By placing your assets in a trust, you legally transfer ownership and control to the trust itself. This arrangement can provide significant protection, as creditors seeking to sue your business would not be able to access your personal assets held within the trust.
You may even want to consider incorporating an offshore trust to protect your personal assets from exposure to business activities.
Some exemptions allow the protection of specific assets. Many states allow a homestead exemption, which would protect the value of your home, for example.
Risk Management Strategies
Another key strategy for how to protect personal assets from business losses is managing your risk. You can deploy multiple strategies in the operation of your business to minimize risk to personal assets.
Contractual Protections
When performing services for clients, always use business contracts. Ensure each contract spells out the work you’ll do and any consequences if you do not live up to your claims. Any contracts should be on your official business letterhead, which helps emphasize the clear separation of your business and personal life.
Employee Management
If you have employees in your business, you should never give them your personal credit card to make small purchases. Neither should you pay your employees or reimburse their expenses with a personal check.
Make sure your business liability insurance protects your business and your personal assets from any errors your employees make that could harm clients.
Compliance With Laws and Regulations
Never try to work around laws or regulations that fit the type of business entity you are using. If the law requires you, as the business owner, to hold official meetings to comply with the rules for operating as a corporation, do it. If you deviate from the rules in any way and for whatever reason, a court could determine you can’t have the protection a corporation provides. A simple oversight like this could leave your personal assets at risk.
Ongoing Monitoring and Review
Once you have a business structure in place that you believe is properly protecting your personal assets, you can’t assume the process is over. Monitoring the structures you use and how your business is changing continuously is important to ensure continued protection.
Regular Assessments
Scheduling regular reviews and assessments of your business is a key step in protecting personal assets from business mishaps and lawsuits. You and your business liability attorney can discuss any changes in your business that could affect the risk to your personal assets.
If the business is growing and you’re starting to hire employees, for example, you may need to change the plan to protect your personal assets.
If you schedule regular assessments with your attorney, you can always set up a review between assessments when you know a major change to the business is on the horizon.
Updating the Plan
Any good business structure plan should allow for updates as needed. Very few businesses continue in the same structure throughout the company’s lifetime. Your attorney can set up your initial plan to allow changes to occur with minimal hassles.
Common Mistakes To Avoid
When following steps to protect personal assets from business losses, it’s helpful to look for common mistakes that businesses make.
Underestimating Risks
Some business owners may not believe they have any risk to personal assets because of their industry or the type of work they do. However, even service businesses could have a risk of a lawsuit for failing to live up to a contract or giving bad advice.
Having the right liability insurance can help you avoid some of these risks. However, the right business structure is equally important for protecting personal assets.
Ignoring Business Formalities
After you set up the business structure, always follow the rules required by that structure. If you must hold regular meetings or maintain certain records to ensure your business follows the required regulations, take these actions.
Don’t assume you can use your credit card for business expenses once or twice without incurring some sort of risk. Someone suing your business and trying to gain access to your personal assets could uncover your one slip-up and use it to convince a judge that you are not following the required rules.
Failing To Review and Update
Your business is constantly changing. Regular reviews of your business structure and operations help keep your personal assets safe during business growth and shifts.
Let Blake Harris Law Help You Protect Your Personal Assets From Business Lawsuits
Blake Harris can help you find ways to keep your personal and business assets separate from a legal standpoint. Learning how to protect personal assets from business losses and lawsuits is vital to protecting your financial well-being. Contact Blake Harris Law today to create a plan that perfectly fits your business and personal needs.
