Definitely. All business owners expose themselves to some legal or financial risks when they start the business. Whether a business transaction has gone bad, or a business partner has objections to how the business is being run, lawsuits and liability are always a possibility. Small businesses need asset protection, just as larger business and even individuals do.
Why is asset protection necessary?
The reality is, not all legal or financial risks are obvious. When you sign a lease or open a credit account, you know that you are entering into legally binding agreements that come with consequences if the agreement is not kept. But, how many business owners think about protection when a product you sell is defective, or if you have legal issues with a business partner or investor? While 100% asset protection does not exist, proper business planning can reduce the risk substantially.
Consider forming an LLC
An LLC, or Limited Liability Company, is the first step to small business asset protection. The owner must open a separate bank account and be sure to conduct business in the name of the LLC, instead in the owner’s individual name.
If your company has more than one member, then you need an Operating Agreement to describe your relationship and each individual’s rights with regard to the business. The most important provision is what happens if one member wants to leave the business.
Obtaining insurance is important for asset protection
Even with an LLC, business owners need to obtain the appropriate insurance for their business. The type of insurance you need will change as your business grows and develops. It is important to also consider an umbrella policy that provides individual (personal) protection above your auto or homeowner’s insurance policies.
Pension plans offer great asset protection
Pension plans, or retirement plans such as IRAs and 401(k)s, offer some of the best asset protection for small business owners. This doesn’t mean you should withdraw from your retirement account to pay business debts. Instead, your retirement plan should be thought of as a lifeboat.
If you establish a qualified pension fund, it will be protected up to an unlimited amount. There are certain statutory exemptions, as well, that protection certain household and homestead assets against collection. These provisions can provide a safety net against a personal financial crisis.
Most business owners may not consider what will happen if the business fails. However, that possibility must be a part of your business asset protection planning from the beginning. In fact, taking the appropriate steps to protect your assets must be done before there are signs of financial or legal issues. Besides being a prudent decision, your creditors may challenge any transactions or transfers of your assets if they take place after your debts arise. If your small business asset protection planning is completed early on, you will have more options available to you and a better chance of preventing financial problems in the future.
If you have questions regarding small business assets, or any other business planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.