We are excited to announce the launch of a new series of insightful financial articles, brought to you by our firm in collaboration with our esteemed strategic partners. This series is designed to provide valuable expertise, in-depth analysis, and actionable strategies to help navigate the ever-evolving financial landscape. Each article will cover a wide range of topics, from market trends and investment strategies to financial planning and risk management. Stay tuned for expert perspectives that will empower you to make informed decisions and achieve your financial goals.
We are pleased to introduce the first article in our series, Protecting Your Business and Personal Assets, written in collaboration with our strategic partner, Julia Smolka, JD. In this informative piece, Julia will share essential strategies and insights to help entrepreneurs safeguard their personal and business assets. Whether you’re just starting your business or looking to strengthen your financial protection, this article offers valuable guidance on minimizing risks and ensuring long-term success. Stay tuned for more expert advice in this ongoing series!
By Julia Smolka, Robbins DiMonte, Ltd.
Starting a company is an exciting venture, and working for yourself offers many rewards. Small businesses, in particular, are a major part of the U.S. economy. In fact, 99.9% of U.S. firms are considered small businesses, and nearly half (45.9%) of U.S. employees work for small businesses. So, small businesses are here to stay.
However, while the prospect of being your own boss is thrilling, the risks can be daunting. One of the biggest concerns is the potential financial fallout if things go wrong. Losing your house or personal assets can feel like a real possibility. Fortunately, there are a few critical steps every business owner should take to help protect themselves from unexpected risks and liabilities.
1. Get Insurance – It’s Essential
Insurance is a must for any business, whether you own a family-run apartment building, a restaurant, or anything in between. Consult a professional business insurance broker to assess the types of coverage that are appropriate for your company’s needs.
- Premises Liability: If you run a retail business, for example, you should have coverage for slip-and-fall accidents on your property.
- Automobile Insurance: If your business involves delivery services, make sure you have comprehensive auto insurance in case of accidents involving your drivers.
- Umbrella Policy: An umbrella policy offers extra coverage beyond standard limits and can protect you from large, unexpected liability claims. It’s relatively inexpensive and can be a lifesaver in catastrophic situations.
2. Incorporate Your Business
Have you ever noticed the “Inc.,” “Ltd.,” or “LLC” next to a company name? That indicates the business is incorporated, meaning it is a separate legal entity for the purposes of suing and being sued.
For example, let’s say you hire “John’s Painting Pros Inc.” to paint your house. If something goes wrong—like paint spilling on your floor—you would likely sue the company, not John personally. Incorporating protects John from personal liability, as the company is the responsible party.
There are exceptions, however. A common exception is when a business owner personally guarantees a debt (like a loan). The best type of corporation to form will depend on factors like your business structure and tax considerations. It’s a good idea to consult with a lawyer to determine the best course of action for your situation.
3. Separate Your Assets – Don’t Risk Contamination
One of the simplest ways to protect your personal and business assets is by keeping them separate. This strategy limits your exposure if disaster strikes.
Consider this scenario: A family owns three apartment buildings. They form a corporation to hold ownership of the buildings, which is a smart move to protect personal assets. However, they make the mistake of putting all three buildings under one company. If there’s a fire in one of the buildings and someone is injured, that person can sue the corporation. Once the insurance coverage is exhausted, the injured party could go after the assets of the corporation, including the other two buildings.
If, instead, the family had formed separate companies for each building, the injured party would only be able to go after the assets of the company that owns the building where the fire occurred, protecting the other properties. Incorporating each asset separately can provide valuable protection in the event of a lawsuit.
4. How You Own Your Home Matters
The way you own your home can also offer protection against creditors, especially if you’re married. In certain states like Illinois, owning your home as “tenancy by the entirety” provides protection from creditors pursuing only one spouse’s debts.
For example, if a wife guarantees a business loan and her business fails, creditors can’t seize the family home—if the home is titled as “tenants by the entirety” and she and her spouse live there together. This protection ensures that only joint debts affect the family’s home, while personal business debts of one spouse won’t put the home at risk.
5. Take Action Early – Don’t Wait for Trouble
It’s crucial to take these protective steps before problems arise. If you’re unsure of your business structure or how to best protect your assets, it’s worth hiring an attorney to audit your holdings and provide guidance. Taking these precautions now can save you from significant financial and legal headaches later.
