A2X Consulting

Owning a small business is a tricky enterprise. On one hand, you get to work on something you are absolutely passionate about, with no cap on your potential earnings, building a business that you could potentially hand down to your family when you’re ready to retire. On the other hand the market is incredibly tough, and you’ll probably have to sink a great deal of your own money into a business to help it succeed. That says nothing about the loans you might have to take out, or the second mortgage, or the fact that you could do all of this and still fail. Since most businesses, even those run by savvy entrepreneurs fail within the first five years, most people incorporate in order to limit their exposure to risk. They’ll set up a limited liability company, S-corporation, or some similar structure, so that their personal assets are kept safe in case of some legal or financial issue. The problem is, none of those structures will keep you safe from litigation, and even if you’re in the right, you’ll have to pony up to defend yourself. So how do you protect your small business assets from all of the potential devastating circumstances that can hit your business? Here are five of the best ways to get started.

First off, create an inventory. Look over your business and personal life from top to bottom and craft a list that accounts for every single asset, and every current debt. Once you’ve got that inventory created, revisit it to address changes twice a year. Remember to call every single thing into question. Any retirement accounts, vacation homes, stock options, or even college savings for your child could be claimed if there’s a problem. Your best chance is arming yourself with a complete knowledge of your situation.

Next, start researching all protective entities and possible exemptions. Depending on federal and state laws, some of the assets you’re holding could be exempt from any action by creditors. You’ll want to know what they are. Depending on the state, that generally includes your family home, your life insurance policy and your retirement fund or pension. If you ask an attorney, they’ll tell you to keep those items in your name and nothing else. When it comes to all other assets, look at options for protective entities, including trust accounts, both domestic and offshore. The more entities you have, the more protected your assets will be. And if you do need equity or refinancing options, use those trusts as collateral. If they are leveraged, creditors won’t go after them as quickly.

When conducting your business, make sure you never give a personal guarantee. That’s tying yourself directly to a business commitment, and you don’t want to do that. If you commit to be personally responsible for any accrued debt, you are actually giving up the right to your company’s corporate protection. The only time you should give a personal guarantee is to a bank, if you’re looking for a small business loan. But make sure in those cases you link it to one particular asset, or set a clear time limit.

You should also be very careful about any contracts you sign. Some contracts personally signed can give that party a claim towards your personal liability. If you must sign a contract, make sure it includes caps on any claimed damages, as well as limits to the damage claims that can be made.

Finally, consider picking up liability insurance. You can never have complete asset protection, but with liability insurance you won’t ever be harmed by cases of property damage or personal injury. If your business is often exposed to risks like this, look into umbrella policies that can go further. Research several different options, and have your attorney look them over before committing.

Sarah Danielson writes for Seareach plc, where you can find custom security labels and stickers to protect your assets.