A lawsuit that deprives you of your personal savings is a possibility any business owner should guard against. No matter whether you are new to entrepreneurship or a seasoned company owner, you should have effective asset protection methods in place.
By keeping your personal assets separate from your business finances and properties, you stand a better chance of preserving your wealth through retirement and after your death so your family can inherit it.
Create an irrevocable trust
One way to clearly separate your personal and business assets is by establishing an irrevocable trust. This kind of trust is different from a revocable trust because the property placed in the trust is no longer owned by the grantor. Since you relinquish ownership and control over the assets, creditors have little chance to claim them to satisfy your business debts and liabilities.
Create a separate business structure
Another way you risk your personal money is if you and your business are one and the same, such as acting as a sole proprietor. Creating a company with its own legal identity provides a layer of protection by separating business liabilities from your personal assets. Common examples of these types of businesses include LLCs and corporations.
According to the U.S. Small Business Administration, creating a DUNS number for your business can further establish its own identity. This allows your company to construct a credit identity apart from your personal credit score.
Establish proper contract terms
A well-written business contract defines your entrepreneurial obligations. Your founding business documents should also create boundaries between the resources you put into your company and your personal assets. You can reinforce your contracts by keeping your personal and business funds in their own respective bank accounts.
These methods may be particularly effective if done together. This should prevent loopholes that allow your personal assets to become the target of creditors.