Business assets are real and movable property that are meant to generate income. Because they have inherent value, they can become attractive targets for potential plaintiffs, creditors, and even unscrupulous individuals looking for monetary opportunities to exploit unprotected assets.
7 Business Asset Protection Tactics
- Structure the Business Properly
- Set Up Business Contracts
- Purchase Business Insurance
- Keep Personal and Business Assets Separate
- Meet Legal Requirements
- Exercise Homestead Exemption Rights
- Apply for Trademarks/Patents/Copyrights, etc.
As of 2021, 8.9 percent of the United States population are business owners. There are over 32 million small businesses in America, comprising a whopping 99 percent of the marketplace. The most common types of businesses by order of popularity are health care, food and hospitality, arts and entertainment, personal training, web and graphic design, auto repair, and a handful of others before real estate comes in at the No. 10 spot.
As you can see, small business owners offer a variety of services, which often overlap with their personal interests and expertise. Most business owners are self-sufficient, enterprising individuals with an independent streak, as indicated by the 61 percent of small business owners who wanted to be their own boss, and the 48 percent who were dissatisfied with corporate America.
Small business owners often fill in the gaps between corporations and consumers. For example, most Americans do not have health insurance coverage through an HMO like Kaiser, which provides their own doctors. Rather, they visit their own primary care practitioner, likely a local doctor or medical specialist who is running their own business.
Small business ownership is also a strong force in the business to business (B2B) space as well. For example, a boutique store looking to upgrade their website will likely hire an independent web designer for the task, rather than solicit the services of a large company that might charge more to cover the various components of their overhead.
Small business owners typically need assets to run their business. For the owner of a retail store, this includes inventory and displays for showcasing the inventory. For the owner of a restaurant, this includes food and appliances. Even service-based businesses have assets—for example, doctors and dentists need medical equipment, web designers need computers and tablets, and a consultant may need a vehicle to drive around and meet clients. No matter what type of small business you are looking at, there’s a good chance it owns assets.
This is also true if your small business is in the real estate industry. In this case, the assets of your business are real property, whether it’s commercial property like a hotel or strip mall or residential property like a portfolio of single-family housing. In fact, when it comes to protecting business assets, real estate inventors must take this consideration very seriously because real estate is one of the biggest generators of lawsuits. If anything goes wrong on the property, especially if it’s multifamily housing, like an apartment complex or a warehouse, there is a decent chance that the plaintiff in question may attempt to address their damages through your assets.
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Why Do I Need a Business Asset Protection Plan?
If you are a small business owner, you need to legally register your business. In many states, if your business involves a particular service that requires some sort of advanced degree or fiduciary services—medicine, architecture, engineering, accounting, for instance—there’s a good chance you also need to be licensed, insured, and create a formal business entity.
But what if you run a business that does not require advanced training or accreditation? You still need to develop an asset protection plan because it will protect the assets you use for your business, as well as your personal assets, like your house, vehicle, cash, and retirement portfolio. Even if you are convinced that your business has no tangible assets, there may be intellectual assets you need to protect, because someone can steal those and start making money off of your hard work. Additionally, a business with no assets can also become the gateway for a disgruntled or unscrupulous party to explore targeting your personal net worth.
An increasing number of business owners do not consider themselves business owners, but rather freelancers or gig workers. A freelancer worker might find work through a marketplace or their own marketing efforts. They do not get a paycheck from an employer, but rather each and every client they have pays them as an independent contractor. These freelance workers are actually running their own business, though, whether they mainly interact with consumers or with other businesses. Moreover, many of these freelancers have business equipment they use to run their business, including computers and vehicles.
Unfortunately, many freelancers do not consider creating an actual structure for their business or exploring the advantages of an LLC. This means they are exposing themselves personally to potential lawsuits, and do not get to enjoy the ancillary benefits of asset protection, like tax breaks. The same is true for gig workers, although it largely depends on the platform through which they obtain work.
Even landlords are considered small business owners. Even if you don’t treat your real estate investments as a business, you should. You may think it’s silly to jump through all the legal hoops and fill out paperwork just because you own a vacation home that you sometimes rent out on Airbnb, but it’s still important to protect these assets. Not only so you don’t lose the asset itself in a lawsuit or have it taken from you by a creditor, but also because you really need to separate your personal life from your business. Otherwise, that plaintiff or creditor might seek to address damages through your personal assets.
7 Business Asset Protection Tactics to Limit Liability
There are many ways to protect your business assets from lawsuits, creditors, and other unscrupulous individuals. These tactics include:
1. Structure the Business Properly
The first step to protecting your business assets is to structure your business properly. This does not necessarily mean you need to structure it as a corporation. In fact, one particular corporation category, the C corp, would most likely be disadvantageous to small business ownership. A C-corp is a good structuring tool for a larger business that wants to raise capital by issuing shares of public stock, but it is not good for a small business owner because their earnings would be taxed twice—once at the corporate level and again on their personal income tax return.
Instead, an S corp is a better small business categorization. The S corp is a pass-through entity whereby business profits and losses are passed through to the personal tax return of the owner or owners, thereby helping them avoid corporate taxes. An S corp can also help a business owner avoid onerous FICA taxes. For employees, half of their FICA tax burden is shouldered by their employer, but for the self-employed, the full 15 percent of FICA taxes must be paid on all earned income, unless of course, only a portion of that income is taxable income paid to employees or board members. This allows S corp owners to put themselves on payroll, thereby avoiding FICA taxes on the rest of the income from their business.
You have probably heard about a limited liability company (LLC) as well. An LLC can also be a useful tool for limiting your personal liability in terms of business operations. The LLC separates you from the business and its assets, making it difficult for a plaintiff or creditor to target what you own in order to satisfy a business debt or business-related damages. An S corp provides this type of liability protection as well, but one advantage that an LLC can provide is that in some states, such as Wyoming, the LLC members do not have to be listed. A Wyoming LLC can create an extra layer of obfuscation that hides your involvement in the business venture, which can be useful in the case of real property.
2. Set Up Business Contracts
The next step toward protecting your business assets is to create contracts for the operation of your business. This will include internal contracts, such as those used to create employment agreements. It can also include contracts with external parties, such as rental agreements.
If you are building a real estate portfolio, for example, you will want to create a solid contract system that you can replicate every time you get a new tenant. Rather than using a cookie-cutter contract from the internet, it would be helpful to have a lawyer or legal advisor look over the contract you provide tenants to make sure you are covering all your bases.
Contract law is at the core of business arrangements. In many cases, this will be your opportunity to prevent problems before they begin. For this reason, you should have a retainer relationship with a law firm or attorney who can look over paperwork and make sure everything is structured properly.
3. Purchase Business Insurance
Business insurance is a must for preventing serious losses. Just like you have car insurance, health insurance, and homeowners or renters insurance, you will want to have insurance that covers your business and business assets.
The nature of this insurance policy and its cost in terms of premiums will vary depending on the type of business you have and other factors, such as the net worth of your assets. For example, a large restaurant with a kitchen full of appliances is going to have a much different policy than a real estate agent who drives around showing houses to clients. If you own a portfolio of real estate properties, a fleet of trucks, or several retail or restaurant establishments, you can often find some type of blanket policy that will cover everything, rather than having to purchase separate insurance for each and every asset in question.
4. Keep Personal and Business Assets Separate
If you have structured your business properly through an S corp and/or LLC, you are already well on your way to keeping business and pleasure separated. Having a business structure to hide assets from public record can separate assets like your home, cars, cash, investments, and retirement account out of the hands of plaintiffs or creditors who would see to address their damages (real or imagined) by collecting your cash or liquidating other assets.
Generally speaking, personal property unassociated with your business is considered exempt property in terms of what a business creditor can collect. But if you have, for instance, been operating as a sole proprietor with no S corporation or LLC asset protection, you are potentially looking at a creditor merging the activities of your sole proprietorship with your home, savings account, or movable property (car, boat, RV). After all, what is stopping them from conflating the two aspects of your existence (business and personal life) when you are using the same name and same Social Security number to obtain business financing? This is just one example out of many of why you will want to separate your business from your personal life.
You don’t want to risk piercing the corporate veil by mixing business and personal assets. You can learn more about the best ways to avoid this by signing up for our Structure Implementation Workshop.
5. Meet Legal Requirements
Asset protection strategies cannot grant business asset protection and personal liability protection if you don’t meet the legal requirements for your state, county, and city. These will vary from location to location, so your best bet to make sure you’re staying fully compliant is to consult with your local Small Business Association.
This branch of local government is specifically set up to help business owners navigate the world of licensure, permits, and other paperwork needed to run a business. Failing to meet these requirements can put a serious dent in your asset protection planning because negligence or a lack of good faith in the way you run your business can sometimes mean forfeiting the protection of legal structures geared toward an asset protection strategy.
For example, if you are a restaurant owner and do not have a liquor license, but choose to have an open bar at an event you cater anyway, that can open you up to a world of liabilities. If that open bar leads to any accidents, there’s a good chance there will be legal consequences for your business that can endanger its assets.
6. Exercise Homestead Exemption Rights
If there is some reason why a business creditor will be able to reach beyond your business and into your personal assets, they won’t be able to take your personal residence. This is because most states provide a homestead exemption to personal property, which allows homeowners to retain their primary residence without creditors seizing it.
However, it’s important to note that the homestead exemption in most states is often limited to how much equity a person has in their home. If the amount of equity in their home is beyond a certain threshold, creditors can force the sale of the home to collect the debt. This threshold ranges from state to state, anywhere from $5,000 to $50,000.
It’s important to note that homestead exemption laws do not apply in New Jersey or Pennsylvania. Additionally, homestead exemptions cannot fend off secured creditors, like a mortgage or a personal loan where you listed your home as collateral.
A similar asset protection tool you might explore is a trust, like a revocable trust. A revocable trust can be changed during your lifetime, unlike the irrevocable trust. A trust is a separate legal entity for holding assets that can be enjoyed by beneficiaries—in this case, you and your family. A revocable living trust can become a useful tool for keeping trust assets (like a home, cash, or invested money) out of the hands of offended parties that are poised to take your assets, even if they have reached beyond the business to threaten your personal property.
7. Apply for Trademarks/Patents/Copyrights, etc.
Intellectual property does not relate to every business, but if your business involves selling a product you invented or selling information, like a seminar, book, or online program, you will want to make sure this information is copyrighted or patented. Trademarking relates more to marketing, such as taglines, slogans, or corporate imagery. Each of these things only costs a few hundred dollars to do, and can easily be handled by a legal specialist, like a patent attorney.
The intellectual protection of your business, both in terms of its core assets and its marketing, is absolutely essential because business-related piracy is rampant. For example, there are thousands of business vendors selling items on Amazon that were made in violation of international business and intellectual property laws. Even domestically, this can become an issue when a competing business or opportunist takes your hard work and starts profiting off it. Without the proper trademarks, patents, and copyrights in place, you won’t have much legal recourse to shut down these competitors and reclaim your legal right over the product or idea you invented.
Business Asset Protection is Essential for Small Business Owners
Assets are necessary for running your business, especially if a large part of your business revenue is obtained from the sale or operation of those assets. For this reason, it would behoove any business owner to put strategies in place for protecting their business assets.
Some of these strategies will include adhering to federal, state, and local guidelines for running the business. Others include properly structuring the business, obtaining insurance, and registering intellectual property. And once these strategies are in place, even your personal assets will benefit from increased protection.
Each and every business is unique, which means different businesses will require different asset protection strategies. Schedule a free consultation with an Anderson Advisors asset protection expert to create a customized asset protection blueprint today!
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