Running your own business means constantly striving to stay on top of finances, trends, logistics, employees, and competition. While protecting assets may not be at the top of your priority list, it is critical to safeguarding your business, and your own livelihood. From debts and other financial obligations, to unforeseen lawsuits and claims, risks are around every corner for businesses both big and small. Fortunately, there are a variety of solutions, many of which can be combined and matched to fit your unique needs when it comes to securing assets.
Business Structures
If you are just starting out in business, you may be operating as a sole proprietor. This works well enough in the short term, but creating a formal business structure provides greater protection over the long term. By forming a legally-recognized entity for your business, separate from you, you gain protection from personal liability if someone sues your business.
Examples of business structures that provide personal liability protection include:
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Limited Liability Corporation (LLC)
LLCs are a popular choice for many business owners, as they are “pass-through” entities, and are easier to set up than many other organizational structures. Pass-through entities are businesses in which profits are recognized on owner and shareholder tax returns, meaning that more money is typically kept by individuals. LLCs also have fewer requirements than other organizations, so small business owners may find this structure most suitable.
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C Corporation
C corporations are not pass-through entities, but they do have several tax advantages over LLCs. On the flip side, they do incur additional fees, and are subject to far more governmental regulation.
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S Corporation
Similar to LLCs, S corporations are pass-through entities. S corporations have a number of additional requirements, including a maximum number of shareholders, types of stocks that must be offered to investors, and rules about how profits and losses are split among shareholders. S corporations must also have a board of directors, meaning more internal oversight.
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Trusts
In lieu of, or sometimes in combination with, a business structure, some entrepreneurs may elect to have assets transferred to a trust. Trusts are their own legal entities, and offer liability protection to the owner of the trust, known as the beneficiary. Trusts are set up with multiple guidelines, and the person who manages the trust — the trustee — can only act within those guidelines. There are two types of trusts that can be used for the transfer of assets: revocable trusts, and irrevocable trusts.
- Revocable (or “Living”) Trusts are entities that can be changed at any time. They offer little, if any, liability protection to the beneficiary, so these types of trusts are not recommended when attempting to protect personal or business assets. Revocable trusts are typically set up for individuals who cannot, or do not wish to, handle their own assets.
- Irrevocable Trusts, on the other hand, are generally quite secure when protecting assets from liability. These are trusts that cannot be changed once they are signed (other than in exceptional, rare circumstances). The beneficiary is also not taxed on any income generated by assets held within an irrevocable trust.
Separating Assets
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Personal and Business Assets
When first starting out, it can be difficult to separate your personal finances from your business finances, particularly if work follows you everywhere you go. Yet, mixing these assets can be messy. As soon as possible, set up a business bank account, including a business credit card, for work-related expenses. In any event, you will need to have a business bank account set up in order to register your LLC or corporation, so it is a good idea to get into this habit early.
If you can avoid it, do not personally guarantee any debt that your business incurs. Otherwise, you can be held personally responsible for any unsatisfied amount. This, of course, would defeat the entire purpose of setting up other protections for your assets.
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Multiple Businesses
If you are a particularly ambitious business owner and run multiple business ventures, you would be wise to keep those ventures separate. Doing so will ensure that each remains its own legal entity, so that if one business is sued, your other enterprises are kept safe.
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Insurance
Regardless of intentions and planning, accidents can and do happen. Insuring your business may help mitigate costs associated with those unfortunate events, similar to how auto insurance can protect your finances from accidents on the road. There are many types of insurance, and your business may need to seek out multiple types of coverage. It is in your best interest to speak with an experienced PA asset protection attorney regarding your options.
Contact Reager & Adler, PC Today
Your business is unique. So are your risks, liabilities, and assets. Working with a skilled business law attorney will help you identify potential problems before they occur, leaving you free to work on building your business. Contact Reager & Adler, PC to start protecting your business, and your assets, today.
David W. Reager, Founder & Managing Partner
Reager & Adler, P.C.
2331 Market Street
Camp Hill Pa. 17011
(717) 909-6946
dreager@reageradlerpc.com