Successful business owners often place themselves in a position where their business comprises the bulk of their personal net worth. If they lose the business, they would lose almost everything. They inadvertently expose their company’s entire net worth to every risk. Here are three ways that business owners can protect their business and personal assets:
Separate Business Operations from Business Assets
The operations of the business is the part of the business that is the most likely to create liability exposure. When we separate the operations of the business from the bulk of the business’s assets (inventory, cash, intellectual property, etc.), the risk to those assets is substantially reduced.
To accomplish this separation, we retain the existing corporation which we will call OldCo, and we form a new corporation or Limited Liability Company (LLC) which we’ll all NewCo. The assets remain in OldCo and business operations is conducted by NewCo. As a general rule, liability for acts of a corporation or LLC is limited to the assets of that corporation or LLC. Because the bulk of the assets remain in OldCo, they are protected from acts which create liability to NewCo. The assets are not part of NewCo so they cannot be attacked for any actions of NewCo.
Remove Personal Guarantees from Business Agreements
It’s important to remove a business owner’s personal guarantees from all business leases, promissory notes, and financing agreements. While personal guarantees are generally required during initial start up years, when a business has become well established and successful, negotiation with lenders and others to remove personal guarantees is often successful.
Full Property and Casualty Insurance Review and Assessment
In the event that the business operations results in a claim, whether by a customer or employee, insurance is generally the first line of defense and compensation. Therefore, it is imperative that an insurance advisor conduct a full review of the business property and casualty policies, assess liability coverage and identify any gaps in coverage.
Business owners can protect their business and personal assets by separating business operations from business assets, removing personal guarantees from business agreements and making sure they have sufficient insurance coverage to defend against and compensate for any acts of the business operations which result in liability to the company and/or the business owner.
If you would like to discuss strategies for protecting your business and personal assets, contact us today.