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Liability Limiting Practices

These are the things every small business owner should know about protecting personal assets from lawsuits, creditors and business liability. Being self-employed and owning your own business comes with inherit risk, even big businesses land in financial trouble and sometimes fail.

Most of the time small business owners are busy with work, life, family and have just enough time to keep it all together – while never fully understanding the potential liability their assets are exposed to in a business day – or how asset protection plans can limit that risk.

Planning for Entrepreneurs

Small business owners need to be especially prudent about protecting themselves against liability both from the business and daily life in today’s litigious society.

Creating even a simple asset protection plan for small business owners with less than $1mm of business revenue and a net worth of $500,000 could be accomplished quickly and from anywhere between $2,500 and $14,000. The sooner you start asset protection planning the stronger it is and less expensive it will be to defend your plan in the event of a lawsuit.

Protective Practices

  • Properly incorporate your business – most business owners are aware of the limited liability associated with incorporating or forming an llc, however to maximize asset protection a few points should be scrutinized. Forming your business, funding it, operating it and maintaining it should be done with asset protection in mind. This is your first layer in limiting personal liability in your business.
  • Understand your assets – regularly inventory your debts and assets, including second homes, investments, retirement accounts, corporate stock, etc. These are important assets that can be taken away during litigation.
  • Know your exemptions – your assets may already be protected from creditors, such as your primary residence, retirement account or pension as well as life insurance. When state or federal laws provide sufficient protection from creditors your asset protection plan should focus on fraud claims, divorce and tort liability (negligence).
  • Do not personally guarantee business contracts and loans – by signing a personal guarantee you essentially disregard the limited liability of your corporate entity in the event of failure to pay or perform on a contract. Find a financial institution or vendor who does not require a personal guarantee to work with you. If you must guarantee a business agreement then apply limitations for a specific time or pre-determine an asset to be used as collateral in the contract.
  • Execute contracts as an agent using the corporate instrument – a contract executed before your business was formed, or by you personally (without the corporate instrument) could legally be considered a personal guarantee. When executing contracts always ensure you are acting on behalf of the business. Contract liability can also be limited with protection in the contract by capping or disallowing specific damages.
  • Have insurance – this is your first line of defense for all liability, business, property, automotive, etc. Always have insurance, period.