There are options available to entrepreneurs seeking to protect themselves from potentially formidable personal losses stemming from business liabilities and lawsuits. The structure you choose for your business is an important piece. If you set up your venture as a corporation or a limited liability company (LLC), you can limit your liability, but even this is not necessarily an ironclad means of shielding your personal assets from someone who is highly motivated to recover.
The idea is to erect a robust firewall between your business activities and potential liabilities and your personal assets that cannot be breached - at least not easily.
This is a time for bringing in the experts - "DIY" isn't the appropriate tack to take on this one: Reach out to your accountant or business attorney for guidance on setting up an asset protection plan that includes strategies to legally shield your personal wealth. Because of the assorted tax and business consequences, you'll need someone with expertise in these areas, and ideally in your field as well, to help establish the best route for your firm.
Some additional steps to take:
- Know what you have. Take stock on a regular basis of everything you have in the form of debts and assets.
- Brush up on federal and state laws pertaining to asset protection. Put your name only to those assets that are exempt from creditor actions, and think about erecting some protective entities, such as trusts for legally unprotected assets.
- Don't make it personal. Some banks, such as those issuing Small Business Administration-backed loans, require a personal guarantee in which you (as the borrower) pledge a personal obligation for a debt.In instances when you can avoid making such declarations, do so. If you can't, seek to blunt its impact by imposing a time limit or naming a specific asset to serve as collateral.
- Be cautious about contracts. When you sign business contracts, do so on your company's behalf and not in your own name to prevent the possibility that someone will try to construe it later as a personal guarantee. Also, establishing your business as an LLC or corporation may afford you some protection, but it won't be sufficient in the event there is a tort action or fraud claim filed against your company. Be sure to include liability safeguards in your contracts, such as stipulating a ceiling on damages or disallowing some types of damages altogether.
A final piece of advice: Talk to an insurance broker about obtaining business liability insurance coverage. If you were to be targeted in a suit, and it emerges that your company was at fault, you would have insurance funds at hand to offer a settlement in the case instead of possibly being pushed into bankruptcy. Even if you are ultimately cleared of any wrongdoing in such a suit, proving your innocence in court also can be a pricey proposition.
~ Adapted from Businessweek.com
