More than 100 million lawsuits are filed in U.S. state courts annually—and for a small business owner, it only takes one suit directed your way to put all your hard work, aspirations, and assets at risk.
The good news is there are a variety of proactive options available to entrepreneurs to help prevent lawsuits and safeguard their business and livelihood in the case of a civil claim or judgment. These plans can protect your personal assets such as your home, vehicles and personal bank accounts from being seized as a result of litigation.
Asset protection trusts
Don’t fall into the trap of believing trusts are only for the wealthy. In reality, these agreements—which essentially designate third parties as guardians of certain property and/or assets for another’s benefit—can serve as a vital tool when it comes to protecting your assets from civil claims or money judgments. An asset protection trust, for example, can help creditors to settle with debtors and avoid expensive litigation.
Remember, the type of trust you are able to set up—and whether you have to pay taxes on its balance—will be dependent upon state laws and regulations.
Corporations have long been recognized as one of the best-known vehicles to protect assets. Each type—whether a C corporation, limited liability company (LLCs) or S corp—has its own set of unique guidelines and requirements. All, however, provide limited liability to the corporation’s directors, principals, and officers. Shareholders of corporations are not personally liable for debts or breaches of contracts.
A limited partnership—that is, an agreement that one or more business partners are liable only up to the amount they’ve invested in the business—can help you avoid losing major personal assets such as a home in the event of a claim or judgment.
Professional Liability Insurance
Professional liability insurance is often for those working in certain professions. It protects lawyers, medical professionals and accountants, for example, from any claims initiated by clients. Generally, liability insurance doesn’t protect against claims of malpractice, negligence or misrepresentation.
Taking the First Step
First and foremost, be sure to keep your business and personal finances separate—on paper and in practice. It’s perhaps the most effective way to ensure that your personal assets remain clearly delineated from the business assets.
Your financial advisor can help you put in place best practices for managing both business and personal finances.
Lawsuits happen—but you shouldn’t let that fact stand in the way of your dreams. Setting up an asset-protection plan as early as possible can reduce stress and prevent significant asset loss so you can get back to the exciting, gratifying act of building your business.