Sometimes you will need more than an umbrella to protect your personal assets.
Financial risks are not something to be ignored
Something that is widely misunderstood, especially with business owners, is how to protect their personal assets. Many business owners have been taken advantage of with high-priced asset protection plans that don’t provide the protection they promise.
Others avoid the topic, crossing their fingers that an expensive legal issue or accident doesn’t come to pass. Others are just plain to risk adverse and cannot see the trees for the leaves.
Become aware of the risks and seek advice on a comprehensive asset protection plan to prevent or at least significantly reduce risks by insulating your business and personal assets from a disaster or claims by creditors.
As your business grows and becomes viable, you need to go back and clean up the many loose ends you have created. Artists remove pencil lines, and builders remove the rubbish, and so it should be with your business Your business is growing, it’s starting to create value and it’s time to clean up any messes from your start-up until now. It is never too late and it should be done sooner rather than later.
Some of the typical things to clean up
- Stop business and personal finances being mixed together.
- Personal guarantees need to be cancelled or certainly minimised.
- Unused asset liabilities, old leases and guarantees should be extinguished.
- Stop putting business expenses on personal credit
- Repay borrowed money from family or friends
- Key assets need to be insured.
- Employee entitlements should be brought up to date.
- Clean up any outstanding tax liabilities.
- Bring any government compliance issues up to date.
- Don’t leave yourself open to fraud.
- Protect your intellectual property where appropriate.
- Ensure there is adequate insurance in place.
Incorporate your business
Your business should stand on its own from a financial perspective. A business that is not a separate entity to the owners will find it difficult to obtain proper and less expensive financing. It makes your business difficult, if not impossible to sell.
If the business were to fail, for whatever unexpected reason, if it is not properly incorporated it will it take you down with it? Banks, finance companies, credit cards, leasing companies, landlords, governments and suppliers and will sue you, not the business. The business needs its own line of credit, unsupported by your personal guarantees.
Having the business stand on its own feet financially allows you to prosper and build assets personally without having them be at the mercy of the business’s ill fortunes.
By incorporating your business you will protect your personal assets from liability. However, if you have obligated yourself personally as well, you and all of your assets will be liable. As you probably know, you should not keep all your eggs in one basket.
The message is to properly structure your business and keep your personal finances separate to the business finances.
“What you have to do and the way you have to do it is incredibly simple. Whether you are willing to do it is another matter”. Peter Drucker
What you can do
As each of your financial decisions is made, commercial lease renewals and telephone accounts for examples, be mindful that you want to build in the separation from your personal finances and make it a point of negotiation.
Obviously, you can’t make all the changes overnight. It takes place over time, but when it’s done, you are completely free of your start-up liabilities.
As your business grows, use only credit for which the business is liable. Don’t ever take on personal liability for the business again and your personal finances will be much safer, healthier and able to grow. Don’t put it off, as tomorrow may be too late.
Choose the right entity for your business
Operating as a sole trader, as many start-ups do, might seem like the simplest and cheapest option when you’re just starting out. However, it certainly isn’t your best choice when you’re talking about protecting your personal wealth from business risks and liabilities.
As a sole trader, your personal assets like your home, investments and other personal property are completely exposed to potential risk.
Setting up an entity such as a limited liability company will better protect you in the event of a lawsuit. Ask your accountant or legal advisor for advice on your best options to meet your particular requirements. You will find there are other benefits in having an incorporated company.
If you have indeed set up a separate entity, don’t think the documentation is enough to save you should a lawsuit come your way. You need to maintain a separate chequebook for your business, use the company name on all documents, title the property in the name of the company. Most importantly, maintain corporate records, returns and paying any fees associated, compliance is important.
Purchase appropriate insurance protection
Asset protection is about protecting your personal wealth from the threat of business liabilities, which can be a real danger to both you, your family and your business. Insurance is an important part of your business and should be acted upon from the start.
Imagine a customer being badly injured by your product. Without various strategies in place to avoid personal liability, this could involve a lawsuit against you and could result in the loss of your home or other personal assets. It happens and more often than you might realise.
Simply hiding your wealth or setting up another entity can give whoever is after your money another target to pursue.
There are ways to ensure your personal wealth is protected in the event that your business is held accountable for something unforeseen. Consult with you insurance broker, accountant and business advisors.
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If you are like most business owners you will move heaven and earth, and do everything you can to make our business a successful reality. You know there are no fairy godmothers standing by to grant our every wish.
However, it’s not uncommon to find business owners who are unaware of all the potential risks that can harm their business or the options available to protect both their business and personal assets.
Don’t leave all your hard work at risk. If you are unsure what to do seek immediate advice from a financial advisor. Build your business and your lifestyle with fewer worries and pain, no more procrastination.
I have had my share of good times and bad and I believe the one thing that has stood by me are my values which meant I always acted with integrity. Creditors can and will be far less understanding if you act negligently or fraudulently way.
Your best protection is being able to show and demonstrate you adhere to proper business practices and maintain a high level of honesty and integrity, at all times.