Small Business Heroes

by Herve Boinay

How can you best protect your personal assets? Here are some things to consider.

• Keep Your Personal and Business Assets Separate
If you don’t insulate your own assets from those of your business, you could be in trouble. If you operate your business in the form of a sole proprietorship or as a general partnership, these businesses are not registered entities, which means that your personal assets are not insulated from those of your business.

As an example, if you’re a sole proprietor and an angry customer sues you, any assets you own such as your house or car are not protected. Nor are financial assets such as your bank account. These can all be taken should a judgment be found against you.

Or perhaps you’ve formed a two-man partnership with your friend. This may perhaps be an even worse idea than a sole proprietorship is. What this means is that you are as liable for your friend’s errors as you are for your own. You are also liable for anything purchased in the name of your partnership. Remember that one partner’s signature is enough to bind both partners to a debt or other type of obligation. Again, this leaves you unprotected and without any recourse should something happen; you could be left holding the bag.

To protect yourself, use a registered corporate entity, such as a C or S corporation, a limited liability corporation, or a limited partnership. You’ll need to keep your company’s registration up-to-date, hold annual meetings and keep annual minutes, keep business clients separate from your own, and avoid signing any business-related documentation in your name. This keeps your own assets separate from those of your business. By the same token, you are also protected from any debts or disasters incurred by your business.

• Protect Your Business Assets
You need to protect your business and real estate assets from yourself. A limited liability company is an excellent way to help protect key assets. For example, if you have a rental property, you should hold assets either in a limited partnership or in an LLC. These protect you from personal liability if anything should happen on the property and it also provides you another advantage. Should someone become injured on your property, you are protected from being sued directly by the tenant. Remember that the business’s assets are still at risk of suit should the tenant decide to sue. However, if you have adequate insurance, you can help protect yourself from having the claimant lay claim to your assets so as to satisfy your obligation. This strategy comes with a caveat though.

A comprehensive commercial insurance policy can help you keep the property instead of having it end up as a part of a court-ordered settlement. What should you look for? The liability insurance should cover injuries to third parties on your property. It should cover trespassing, especially if you have undeveloped or vacant land. If you have people working on your property as your employees, you should also have Worker’s Compensation insurance. The insurance should also have “increased cost of construction” additions if your building should become damaged or require reconstruction. That means you’ll be covered at today’s construction prices instead of those of previous years. If you are a landlord, “loss of rents” riders can help you recover costs in the event your building is damaged and uninhabitable so that you can pay relocation costs or receive income from the property while it’s being rebuilt to offset right losses. A final consideration is a “higher limits” rider, so that you have extra protection in the event a catastrophic claim is filed in one of these categories.

But as we know, insurance companies have an economic incentive not to cover every claim. They find reasons to deny coverage. So while you will have insurance you will use entities as a second line of defense to protect your personal assets from your business claims.

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