By Rich Best
Unquestionably, business owners enjoy a much greater opportunity than most people to earn a high income. For many of them, their ultimate reward for making the tremendous sacrifice they did is personal financial independence achieved in the pursuit of their passion. As a business owner, you know how to make money – however, with financial independence as your goal, the question becomes, “Do you know how to keep it?”
The unfortunate reality is that the moment a business opens its doors it becomes a target for creditors, litigants, disgruntled employees, ex-spouses, customers and regulators. And, for anyone in pursuit of a monetary resolution for a debt or a grievance, the business owner’s assets are considered fair game to the extent that they can reach them.
Business owners with personal assets such as real estate, retirement plans, savings accounts, luxury cars and anything of value are ripe for the pickings, especially where there are no protections in place to keep them out of reach. It is never too soon to study up on the legal protections that are available to them and that are relatively easy to establish.
Asset Protection Essentials for Business Owners
Know how to structure your business: The law provides several ways for a business owner to structure the business so that a legal divide exists between the assets of the business and the personal assets of the business owner.
The limited liability company structure is fast becoming the preferred method of small businesses to organize in a way that shields personal assets from creditor or claimant assaults. LLCs are interpreted differently in different states, so it would be important to know which states (an LLC can be established in a state other than where the owner resides) provide the greatest protection. Incorporation as a C-Corp or an S-Corp also provides protection.
Know how to entrust your assets: Irrevocable trusts are a legal way to remove assets from your ownership while keeping them in the family. By transferring your assets into the trust, you give up control, which keeps them beyond the reach of creditors. A named trustee continues to manage the assets for the benefit of the family.
Know how to insure your business: The best protection against business-related liabilities is a general liability insurance policy. The more insurance coverage you can get, the better, because the policy will become the “deep pockets” target for litigants. In most cases, litigants will concentrate their efforts on pursuing the insurance company rather than spending time and money litigating in court for your personal assets.
Know how to protect your retirement plans. The protections for qualified retirement plans are varied and complicated depending on the type of plan, the state in which you reside, and the particular kind of protection you need. For the most part, retirement plans are protected by federal bankruptcy laws; however, there may be some limits on the protection imposed by the states.
Also, protection against general creditors and liabilities varies by state and based on the type of retirement plan. For a business owner, any plan that is considered to be an ERISA plan is protected from bankruptcy. As for other liabilities, any plan that solely benefits the owner is not protected. Only when an ERISA plan includes at least one other employee does it receive protection from liabilities outside of the bankruptcy.
You know how to make money, but, if the reason for doing so is to achieve lifelong financial independence, you may want to study up on how to keep it out of the hands of those who want to make your money theirs.
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank or its affiliates.