Business owners often enjoy more freedom and independence than those who work for someone else. This independence is what drives many people to start their own companies. However, along with the perks of being the boss come some less-pleasant side effects. One of the issues these entrepreneurs face, for example, is an overall higher risk of loss, especially when it comes to lawsuits.
Fortunately, business owners have many legal and financial tools at their disposal to protect themselves. Two of the most popular tools are entity restructuring and asset protection. Since these methods are often confused or used interchangeably, we will discuss them both.
What is Entity Restructuring?
Entity restructuring has both legal and tax implications. It can help business owners in 3 distinct ways:
- Legally avoiding excess tax liability
- Protection of assets against legal action
- Providing proper legal and tax arrangements between owners
Proper entity restructuring is an essential tool for any business, providing owners with a level of security and legal stability. For example, the right legal structure may be instrumental in protecting your portion of a shared business or partnership. However, it isn’t something you can “set and forget.” Most businesses will eventually outgrow their original structure or evolve away from it. An experienced CPA should help you establish the right structure, then keep an eye on it to ensure it’s still a good fit. Some examples of legal structures available to your business may include:
- LLCs, both single or multi-member
- General partnerships
- Sole proprietorships
- Limited partnerships
- Corporations and C-corporations
While your legal structure can provide some protection against legal actions, it may not be enough to secure your business and personal assets in the event of a lawsuit. This is where asset protection comes in.
What is Asset Protection?
The term asset protection refers to specific legal actions that are taken with the sole purpose of keeping your business and personal assets safe. Sadly, everything you own, such as real estate, equipment, even family heirlooms or your personal savings could be seized to pay off creditors in the event of a successful lawsuit.
One of the most important rules of asset protection is timing. Your legal measures must be in place before a suit is filed. Asset protection should be part of your financial planning strategy, safeguarding the wealth of you and your family. Talk to a professional to identify and establish your own asset protection plan. Some of your options may include:
- Asset protection trusts
- Family limited partnerships
- Accounts-receivable financing strategies
- Homestead exemptions
- Irrevocable trusts
- Retitlement of assets
Asset protection strategies, along with plentiful insurance and the right legal structure, can provide rock-solid protection for your most valuable possessions. During a stressful legal ordeal, asset protection can keep your personal property out of creditors’ hands.
What to Do Now
Generally speaking, as your business grows, so does the potential for legal action against you. Start today by examining your legal structure with a qualified financial professional to ensure it’s the right fit. Then, plan your asset protection strategy. Go over your needs and goals, and put your structure and asset protection plans into place as soon as possible. As always, the best time to protect yourself is NOW.