The business world is becoming exposed to increased litigation every day. Business owners must adapt and expand their focus from the components driving revenue, to the components that include asset protection in their strategy and planning.
Asset protection is often overlooked and can turn prosperity into fatality; asset protection involves strategy and planning to protect the business, its assets and employees from the risk of lawsuit and litigation before it happens.
It often employs specialized legal knowledge focused on the nuances often missed by business owners. The following five best practices will help protect business assets, owners and employees from potential and costly litigation by planning before the business faces a lawsuit.
1. Using The Appropriate Legal Entity to Protect the Shareholders, Officers and Directors and the Business.
Choosing the appropriate legal entity is key to protecting the business assets as well as the personal assets of the owners or co-owners. As a general rule, never enter into a general partnership because the owner and co-owners are both joint and severally liable.
This means the owners’ personal and professional assets do not enjoy protection for the contracts entered into and tortious activity of the co-owners.
Corporations and Limited Liability Companies (LLC) are the typical legal entities used for asset protection. Corporations, both C and S corporations and the LLC limit the liability that extends to its shareholders, officers and directors.
These forms of legal entities offer the most protection for business owners by keeping any claim or judgment limited to the business assets. The benefit of protection also works in reverse: any non-business personal claim against a shareholder, officers or director limits recovery to their personal assets and not against the business assets.
2. Limit the Signing of Personal Guarantees
A personal guarantee allows a lender to reach the guarantors assets in the case of default. Lenders in this scenario are often banks extending lines of credit, business loans or secured creditors and require a personal guarantee to gain access to credit or loan proceeds; these are okay, but this is where you must draw the line.
Many suppliers or clients may also require a personal guarantee—do not sign them. This limits your ability to operate with autonomy by subjecting your personal and business assets to claims by those suppliers.
3. Limit Damages Provisions in Contracts
The art of contracting is crucial to business success. Businesses can protect their interests in contracts by identifying and redlining the damages provisions in the contract.
Negotiate a contract that limits the damages to a reasonable and fair outcome for both parties. Courts will often respect the contracting parties’ terms and conditions within a contract if the contract is made in a reasonable manner.
4. Utilize an Arbitration Agreement in Your Contracts
An arbitration agreement is essentially a contract that waives the right to a jury trial and makes both parties subject to a neutral third party, often another attorney or retired judge to act as your judge outside of court.
The benefit is that if the business is subject to a legal action, the arbitration agreement will keep it out of trial thereby reducing your legal expense.
5. Purchase Insurance
Insurance is essential in any business endeavor. Insurance provides protection and peace of mind if and when you face a legal battle. Property insurance will protect the physical assets of the business while liability insurance protects the tortious activity of an employee and the negligence of the company.
It is imperative that a specialized insurance representative and attorney are involved in the insurance selection process to ensure that the business’s assets and interests have protection, It is also a good idea to purchase an umbrella policy that covers any gaps in the insurance coverage.
The five best practices, as discussed above, are essential to protecting your business’s assets. Specialized attorneys and accountants are necessary to establishing a solid and robust asset protection plan. Make sure to consult the appropriate professionals to help structure and build the best asset protection plan to protect your business and assets. While an asset protection plan doesn’t add to revenue, it protects your bottom line in the long run, and that is essential.