Entrepreneurs should protect their assets to increase their chances of growing and expanding their reach in the market. They will face challenges when the economy goes into recession when they do not have asset protection.
Many businesses in areas hit hard by the pandemic defaulted on their loans due to low revenues. Even though the government came in to provide relief, many businesses closed shop. But if they work on protecting their assets, they can minimize the risk of losing them to creditors. Here are some ways that entrepreneurs should do to keep their assets safe.
Set Up a Suitable Business Entity
Choosing a suitable business entity to provide entrepreneurs with protection whenever they have to deal with financial issues. Even as it is easy to start a sole proprietorship, this type of business exposes all the entrepreneur’s assets to potential lawsuits.
On the other hand, a limited liability company (LLC) is a good option since it protects the entrepreneur’s personal assets from lawsuits or bankruptcy proceedings. But setting up an LLC is complicated, and some states have limitations on the life span of an LLC.
An LLC provides similar protection as a corporation. But the cost is smaller. This business entity type is a good option for entrepreneurs who want to protect their assets.
Follow Proper Processes and Procedures
Entrepreneurs should also use proper processes and procedures when they negotiate loan and lease agreements with financial institutions. They should ensure that they have contracts with subcontractors and third-party service providers.
They should avoid under-the-table deals just to facilitate the transaction. Once they carry out these deals, creditors can use it to get as much as they can from the assets of the entrepreneur if they miss payments for a loan. Entrepreneurs should also work with insured and bonded professionals to help them with the business.
Apply for Homestead Exemption
Entrepreneurs should also consider applying for homestead exemption. The exemption protects the personal residence of the entrepreneur from property taxes and creditors. In case the entrepreneur passes away, the exemption ensures the surviving spouse has a place to stay.
While some states automatically apply for the protection, entrepreneurs should check with their state to ensure they remain protected. Additionally, some states have a maximum limit on the amount that entrepreneurs can protect their homes. So checking with the local tax assessor is important.
Aside from protecting the home from creditors, entrepreneurs should also keep their homes protected from vandals and burglars. They can do this by installing house alarm systems. Protecting their homes gives entrepreneurs peace of mind as they focus their efforts on growing their businesses and extending their reach in the market.
Separate Multiple Business Ventures
If entrepreneurs have more than one business venture, they should separate the assets to protect them in case one of the businesses goes down. This situation is particularly true among serial entrepreneurs who want to build a business empire.
Thus, entrepreneurs should set up different entities for each business. This prevents assets from comingling with each other. It also prevents other businesses from incurring debt and liabilities in case something happens to one of the businesses.
When entrepreneurs do not legally separate their businesses, it will expose all of them to creditors when litigation happens to one of the businesses. They should ensure the separation reflects on all legal documents, including accounting, banking, and record-keeping.
Put Some Assets in the Partner’s Name
Entrepreneurs can also put some assets under the name of their partners. This is a strategic move since creditors cannot get the spouse’s assets. In this situation, asset protection hinges on a good marriage since these valuable assets are considered the partner’s separate property. This is particularly true if the partner has a lower exposure to risk. A prenuptial agreement is also helpful in this situation in case the marriage ends.
The entrepreneur should also check the laws in his state. The laws in many states protect a couple’s assets when they agree that some assets are considered the separate property of the wife. In this instance, the husband’s creditors cannot go after the assets under the wife’s name. The only time that the creditors can go after the assets is if the two partners are co-debtors in a loan.
But the entrepreneur should plan the strategy well since it can affect the division of the assets when the couple divorces. Therefore, the entrepreneur should look at all potential issues that will arise due to the arrangement.
Protecting the assets of an entrepreneur is important to ensure he can get up and restart the business when the economy improves.