Are you about getting a personal loan or filing for bankruptcy? If YES, here are 10 easy fail-proof ways to protect your business assets from personal creditors. Everyone hopes for their businesses to succeed and hopes to not have a lawsuit on their hands which would lead to their business assets being used to settle personal creditors but sometimes, these things happen whether you want them or not and it is always wiser to take pro-active steps to guard against them.
One of the ways through which you can achieve this is asset protection planning. Asset protection involves protecting your business wealth from personal liabilities and vice versa. You may owe some money to people and those debts may be completely unrelated to your business but if your business assets are unprotected, your personal creditors might take advantage of this and find a way to force compensation through your business assets.
Also, asset protection planning can also help to protect your business in cases of bankruptcy. You can protect your business assets from personal creditors using any of the following strategies-:
10 Fail-Proof Ways to Protect your Business Assets from Personal Creditors
Table of Content
- 1. Proper business structuring
- 2. Separate bank accounts
- 3. Sign pre-nuptial agreements
- 4. Get liability insurance
- 5. Take inventories of your assets regularly
- 6. Equity-stripping
- 7. No Personal guarantees
- 8. Read terms and conditions of contracts before signing
- 9. Acquire Assets in Business name
- 10. Seek legal advice
1. Proper business structuring
The best thing you can do for your business is to make it a separate legal entity. This means that your business would become an individual on its own in the eyes of the law and for that reason, your personal assets and liabilities are not seen as that of the business and vice versa. A good way to do this is by registering your business as a Limited Liability Company.
2. Separate bank accounts
Your personal money must be separated from that of your business. I have seen a lot of entrepreneurs make this mistake. They run their businesses in such a way that their personal money and that of their business becomes mixed up. This might work well but would backfire when it comes to asset protection. Therefore, you must always ensure that you have a separate account for your personal funds and your business funds and the two are never mixed up.
3. Sign pre-nuptial agreements
Divorce law suits can also put your business assets at risk. When you have to go through a divorce settlement, the court would try to split your assets between you and your spouse but you can avoid this by signing a pre-nuptial agreement which protects your business assets from divorce settlements.
4. Get liability insurance
Another way to protect your business assets from personal creditors is through obtaining liability insurance. Sometime, making your business a separate legal entity is not enough because there are cases where the law has the power to ‘unveil the ownership’ of a business entity.
In that case, the veil of limited liability protection is removed. However, you can still protect yourself in such a situation by obtaining liability insurance coverage which would cover for any debts or claims on your business assets.
5. Take inventories of your assets regularly
Ensure that you have a record of every property or asset that belongs to your business and update these records regularly.
For instance, if you have a car which belongs to the business but is usually driven by you, your creditors may think it is yours and take steps to take it as compensation for debts but you would be safe if you are able to show them that it belongs to the business, not you. You should also ensure that business assets are strictly bought in the Business Name.
This method would help to make your business assets unattractive to your personal creditors. It means that you would borrow some funds against your business assets. When an asset is equity-stripped, it becomes unattractive and useless to creditors.
7. No Personal guarantees
All the tips listed above would be ineffective if you sign a personal guarantee stating that you would pay off your personal debts using your business assets. In this case, little can be done to protect your assets.
8. Read terms and conditions of contracts before signing
A lot of people are guilty of this. They do give careful consideration to the terms and conditions of contracts before signing them. Some people even sign without reading them. This attitude is very risky for business owners.
Whether you are taking a personal loan or a business loan, make you carefully read and understand any terms and conditions stated in the contract form before signing it and if there is anything you do not understand or agree to, ensure that you seek clarification before you sign. You can even consider talking to your lawyer about it, he will be able to look out for red flags and warn you about them.
9. Acquire Assets in Business name
I already mentioned this earlier but I think it is very important to further reiterate that your business assets should be bought strictly in the business name. In fact, if there are any personal assets which you have sold to your business or converted to business use ensure that you properly document the sale.
10. Seek legal advice
Another thing that would help is to seek the advice of legal practitioners. Your lawyer would definitely have a few tips and tricks up his sleeves that he can recommend to you to achieve proper business asset protection.
In conclusion, these 10 tips would definitely go a long way in helping you achieve necessary asset protection for your business. Do not forget however, that it is important to plan adequately for asset protection right from the beginning of your business and always take steps to ensure that you have an active asset protection strategy in place because most of the time, you do not see these coming.
Also, you should try to be a good debtor and always have plans to pay off your debts. You may be able to protect your assets from creditors but you can do little to prevent your credit scores from taking a beating when you don’t pay off your debts and these can stand in the way of getting needed funds and loans in the future; so the most important thing is to pay off your loan as and when due, and then protect your assets from circumstances beyond your control.