Owning a business can put not only your company's finances at risk, but your personal finances as well.
As with any investment, business owners must take risks in order to reap financial rewards. To start, run and grow a business, owners must often use some of their own personal savings, credit or other assets. As the enterprise grows, the business acquires its own assets, such as computers, property, inventory and a reputation.
All of those assets, whether your own or your business’s, can be at risk if the business faces challenges or fails.
“If your business encounters a disaster, is sued, or experiences a theft or data breach, your assets could be on the line,” explains Dean Deutz, a private wealth consultant at RBC Wealth Management–U.S. “The end result could impact not only the potential growth of your business, but your ability to meet personal financial goals and plan for a secure retirement.”
Because the stakes are so high, it’s essential for business owners to consider strategies to protect your assets. By taking key steps today, you can work to secure a financial future for yourself and for your business.
Every business owner’s situation will be different, and determining your appropriate asset protection strategies will depend on the shape of your business. For example, if your business is younger, you may be more focused on protecting your personal assets from a potential business failure. But as the business develops and builds value, it becomes increasingly important for you to consider how to protect both your personal assets and your growing business assets.
“If you’re starting a business, you’re taking a risk—if it’s not successful, you don’t want to lose both the business and your personal assets,” Deutz says. “Alternatively, if you have an established business, you want to protect your business assets from being affected by anything related to your personal assets, as well as from any potential lawsuits or claims against the business.”
Consider these three strategies for protecting your assets:
If you operate a sole proprietorship, or unincorporated business, there is no legal or tax separation between your personal assets and your business’s assets. If you incorporate your business, it will be set up as a separate legal entity.
There are several types of corporate structures you can use to protect your assets, each with its own tax and legal implications. They include Limited Liability Companies (LLC), C corporations and S corporations.
As an owner of an incorporated business, you are considered an officer of the corporation for tax and legal purposes. As a corporate officer, you will have no personal liability for corporate debts, breaches of contract or personal injuries caused by the corporation or its employees. The corporation may be held responsible, but to satisfy a claim, a creditor can pursue only corporate assets, not the personal assets of a company owner or director.
In addition to incorporating your business, it’s important to keep your personal and business assets separate. This can help with tax purposes as well as simplify your accounting.
“Make sure you use separate bank accounts and credit cards for personal use and business use, and avoid intermingling personal funds with business funds,” Deutz says.
If you blend personal and business assets, it can be difficult to get a clear picture of your business cash flow and financial health. Additionally, if you can’t show clear documentation of business income and expenses, you may have to pay unnecessary taxes or be subject to an IRS audit.
Another key strategy for business owners to consider is creating a customized insurance plan to provide additional protection for your assets in the event of a lawsuit, accident or unexpected losses, explains Troy Randall, a senior annuity and insurance consultant at RBC Wealth Management–U.S.
“Many owners put their personal net worth at risk in running a business, but having a customized insurance plan allows for the transfer of the risk to a third party—an insurance company,” says Randall. “One of an owner’s biggest assets is their ability to get up every morning and run their business. Having an insurance plan can help protect their business, their income, their employees and, most importantly, their family.”
A customized insurance plan should start with traditional forms of property and casualty insurance to protect property and equipment. It should also include life insurance to protect the business in the event of the owner’s passing and insure business partners through a buy-sell agreement, Randall says.
Additional insurance policies can insure business overhead and disability income as a way to protect the business’s operating expenses and the owner’s personal income derived from the business.
The first step in determining how much insurance coverage you need to protect your assets is to have an idea of the value of your business and the type of assets you want to insure.
“Looking at a balance sheet, profit and loss statements and other types of financial documents will help to identify what kind of insurance would be beneficial and assist with determining the value of the business,” Randall says. “The amount of profit from the business that is being paid to the owner will also help determine how much life insurance and disability insurance is needed.”
By combining that customized insurance plan with other key elements of an asset protection strategy, you can make sure your business is as protected as possible from whatever life may throw at it. You’ve worked hard to grow your business to this point, and taking these important steps can help you secure your business’s financial future, as well as your own.
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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