How to Protect Your Personal Assets From Your Business
Learning how to protect your personal assets means preventing your personal assets from being taken from you because of a business liability.3 min read
Learning how to protect your personal assets means preventing your personal assets from being taken from you because of a business liability. This is an issue that can be dangerous to your personal and professional life, so it requires more than a quick search online. Best practices to protect your personal property include:
- Understanding your exposure.
- Calculating the cost of protection.
- Choosing the right structure for your business.
- Keeping business and personal finances separate.
Understanding Your Exposure
If your business fails, you may be at risk of losing your personal assets if you don't protect them adequately. If your business is sued, you may be sued personally, exposing your personal assets. This extends far beyond the responsibilities of directors listed in the Corporations Act. You may have exposure under the laws regulating workplace safety, the Franchising Code of Conduct, the Environmental Protection Act, the Fair Work Act, and the Competition and Consumer Act.
The Cost of Protection
Of course asset protection does have a cost associated with it, just as any type of insurance does. However, that cost is significantly less than doing nothing, which could mean losing your home, savings, and other property.
Choosing the Right Structure
Establishing your company as a sole proprietorship is the simplest and most straightforward way to get started. However, it's not the best option when it comes to protecting your personal assets from liability for business activity. If you're operating as a sole proprietorship, your home, cash, investments, and property are fair game if your business is sued. No separation exists between personal and business liabilities. If you don't have an official corporate structure, then the default situation is that there is no separation between your personal identity and that of your company.
Corporations, Limited Liability Corporations (LLCs), and S-Corporations
If you set up your company as a corporation or an LLC, then your business has an identity separate and apart from you as an individual. This gives you more protection for your personal property. You have multiple options to accomplish this.
For example, you might set up a two-layer business structure with your business as a corporation and your business real estate in an LLC. If someone gets injured on the property and wishes to sue, he or she could go after the assets of the corporation (business) and then go after the LLC as the property owner. With those two entities to attack, it's unlikely the plaintiff would try to attach the owner's personal assets.
For most small businesses and independent contractors, the most recommended structures are the LLC and the S-corporation, named for a section of the Internal Revenue Code. Keep in mind that your business structure affects your taxes as well as your liability. You want to get advice from a trusted accounting professional to help make this decision.
Keeping Business and Finance Separate
Once you've established your business as an independent entity, the organizing documents alone won't be enough to protect you if your business is sued. It's not enough to simply file Articles of Organization with your state either online or through a service. You also need to:
- Set up a separate checking account for your business.
- Use the business name on your company's documents.
- Put real property titles in the name of the business.
- Maintain corporate books and hold annual meetings with minutes.
- Keep copies of all the documents, regardless of the business structure.
- Pay all the annual fees and file all the annual documents required by your state.
If you are sued, you and your legal counsel can produce these documents as evidence of compliance inside your company and within your state. You don't want to have to recreate documents for past years, and you certainly don't want to falsify your books.
If you don't maintain the proper separation between your business and personal affairs, courts may choose to "pierce the corporate veil," which provides limited liability. Some of these practices can make it easier for courts to make such a finding.
- Comingling: This means that you don't keep a separate bank account, you deposit business income into your personal account, and you pay business expenses from your personal account.
- Failure to comply with the required corporate requirements and formalities.
- Keeping inaccurate or incomplete records.
- Using business funds for personal expenses.
If you need help with deciding how to protect your personal assets from your business liabilities, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.