PROTECTING PERSONAL ASSETS FROM BUSINESS CREDITORS
Asset protection involves taking steps to assure that property that is owned by an individual is protected to the extent allowable by law from potential creditors. An individual who owns a business must takes steps early on to protect their personal assets, as such steps only provide protection on a go forward basis and not retroactively.
There is always a risk in starting and operating a business and each owner should try to minimize the risks to the extent allowable under the law. In starting a business, a person must work hard to establish and grow their business, with the ultimate goal of creating personal net worth.
As the net worth of a business grows, so does the risk that someone will seek to recover money for a real or perceived claim. Such claims could create personally liability for the business owner, unless steps have been taken to insulate the owner from personal liability. Many businesses are still being operated as sole proprietorships or partnerships, which means that the individual owners are personally liable for the debts and obligations of their business.
A business owner without adequate protection could lose their home, savings and other assets which they have worked so hard to obtain. Such risk can be alleviated or minimized if certain simple steps are taken to protect the business and assets through advance planning. This protection can be obtained for relatively little cost through the use of one of many forms of business entities, which are available, to prevent personal liability. The most common of these entities are corporations and limited liability companies.
These entities are a “person” under the law and are treated as separate and distinct from the person who actually owns the entity. In the event that there is a problem which gives rise to liability on behalf of the business, the personal assets of the person owning the business entity are not at risk. The only assets at risk are those of the business entity as it is a separate “person.”
While the owner of the business entity (such as a shareholder of a corporation) may be employed by the corporation, so long as the corporate formalities are observed, the personal assets of the shareholder will be protected. This protection will only apply on an ongoing basis, thus steps should be taken immediately to protect an owner’s interest. A qualified attorney will be able to provide you advice as to how to provide protection as it relates to existing relationships in the future.
It is important to remember, while your accountant may be an expert when it comes to tax planning and accounting, do not rely on your accountant for legal advice or for protecting your assets by creating your corporation. While they may have your best interest at heart, I can only relay the fact that most corporations formed by an accountant usually do not provide the protection desired, and could subject you to personal liability and loss of many tax benefits. You would not go to a mechanic for a medical problem, so use an attorney for a legal problem, not an accountant.
In addition to asset protection, a corporation may provide additional means of tax savings when full use of the Internal Revenue Code is utilized. A corporation has separate tax rates, which may be beneficial, as well as many other provisions. A qualified attorney or accountant will be able to provide specific advice as it relates to specific circumstances.