In business, lawsuits commonly happen. But this can extend to your personal life as well. However, there are more legal options to protect your assets in businesses. Note that in all the things you’ll do to protect assets, ensure it’s legal.
To protect your assets from lawsuits, you’ll need to establish an asset protection plan. You can draft this with your attorney or financial advisor to determine which options are the best. Mind you, you need to be protected before any lawsuit arises. So, you need to plan for this in advance, especially if you work in industries where lawsuits are common or if you’re a startup. That said, here are some tools to use for your asset protection:
Business entities
Every business structure is unique and presents different pros and cons. The ideal business structure for your business depends on the type of business you’re in and other factors, such as tax considerations. That’s why it’s best to research these business structures in depth before choosing one. Nonetheless, you can consult with a financial advisor to help you select a suitable business structure. To find out more about business entities, visit https://blakeharrislaw.com/asset-protection/nevis-llc.
The most common place to start small businesses is through sole proprietorship. Since this business structure isn’t incorporated, it does not offer any asset protection because the sole proprietor isn’t a juristic person. Therefore, creditors can come for your personal assets since there’s no corporate veil.
Another terrible business structure is a general partnership. Here, if your partner or partners lose in a lawsuit or a personal dispute that you’re not directly involved in, lawyers can still come after your assets. Alternatively, here are some options to consider if you’re looking to protect your assets:
- Limited Partnership (LLP)— This business structure overcomes some of the weaknesses of a general partnership. The legal requirement is that you mustn’t be involved in the day-to-day running of the business. When you become a limited partner, it would mean that if a lawsuit happens, the creditors can’t come after anything other than what you invested in the partnership.
- Limited Liability Company (LLC)— LLCs are great because, unlike sole proprietorships, they have limited liability protection. It means that the creditors have no claim or hold on the owners’ assets if there is a lawsuit. The business and the owners are two separate entities and are treated as such in court proceedings. LLCs are more flexible as opposed to corporations, too.
- Corporations— The corporate veil ensures that the business assets and your assets are separate, just as with LLCs. However, there is a drawback where these corporations are often under more regulation and have less flexibility. There is also the possibility that the court can pierce the corporate veil because of business malpractice, for example, failure to pay taxes and separate personal and business accounts.
Insurance
Insurance is perhaps one of the best ways to protect your assets. Various professions or businesses have different risks. So, the insurance coverage required by companies differs. For instance, if you’re in real estate, you may need real estate insurance or home insurance. If you’re a sports person, you may need health insurance.
Nonetheless, insurance protects your assets in a lawsuit. The insurance company should cover the cost of claims in suits that emergences to avoid making irretrievable losses. In the real estate industry, for example, where lawsuits are common, you need to stay protected. That said, here are some insurance policy options available:
- Homeowners Insurance— This type of cover will ensure that if anyone gets injured on your property, it will be covered by the insurance.
- Commercial Liability Insurance— This type of insurance insures your business against any injuries that may occur on the business premises.
- Umbrella Insurance— This is an extra insurance cover you get over and above your current insurance policies. Umbrella insurance is essential because if your main policies cannot settle the full claim amount, you can tap into this extra insurance cover to settle the remaining amount. Thankfully, umbrella insurance is usually very affordable, unlike other insurance policies.
Offshore Trust
This refers to trust with trustees that aren’t US citizens because it’s registered offshore. Therefore, offshore trusts aren’t bound by laws that govern trusts and other businesses in the US. The great thing about them is you can run them just like US trusts, only that they are based offshore. The law is such that only those trusts with trustees who are US citizens can and should follow US court orders.
Now, it’s vital to note that establishing this kind of trust requires expert knowledge. There are many islands and designated places around the globe that allow you to set up these offshore trusts. Therefore, you may need to seek the help of expert financial advisers or international lawyers to guide you regarding how to establish such a trust legally.
Homestead exemptions
These specifically apply to protecting your home. Statutory laws that differ from state to state make these exemptions possible. Every state has a different approach to household exemptions. If you default on a payment or declare bankruptcy, you’re protected by law such that the courts aren’t allowed to come after your home for settlement.
However, it’s important to note that state policies offer varying degrees of protection with homestead exemption. Some states provide unlimited exemptions, while most have a cap. It means only a part of the value of your house is protected, and the creditors can’t lay claim on that specific portion as provided by statutory laws. So, it’s essential to familiarize yourself with your state’s household exemptions first.
Equity stripping
Now, in lawsuits, creditors typically target a person’s valuable assets. What equity stripping does is that it lessens the value of your most valuable equity to make it less appealing to creditors.
The most common way of stripping assets of their value is using extra mortgages or liens on your assets. So, if you have an asset worth USD$500,000 and USD$485,000 is tied up in loans, the remaining equity is way less valuable and may not be worth the chase in a legal case. It’s a clever way of protecting your assets.
Conclusion
While you can do or follow all the above tips to protect your assets, you should consider protecting your business from the get-go. Don’t wait for a lawsuit to establish an asset protection strategy. Anything can happen anytime, and it’s dangerous to plan for a case on such short notice.