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5 Ways for Business Owners to Protect Their Assets

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Jonathan Kinney
BKK Wills, Trusts and Estates Newsletter
August 2015

Asset Protection is often a concern for business owners; particularly if they are engaged in a business with high incidents of litigation (such as doctors, home builders or other construction contractors for example).

Structuring your business as a corporation, limited partnership or limited liability company is a great first step to protect personal assets from business liabilities. However, in our experience, many business owners do not follow the formalities necessary to maintain a limited partnership, corporation or limited liability company as a separate entity. As a result, they may be doing so at their own detriment and losing the asset protection these entities provide. Courts will be more likely to uphold the distinction between business liabilities and personal liabilities if a few simple requirements are followed by the business owner.

Here are five simple tips to follow in order to appropriately maintain your corporation, limited partnership or limited liability company:

  1. Maintain a written record of director and shareholder meetings, including issuing stock or membership units.
  2. Record transfers of ownership interests. In general, it is good practice to record all significant business decisions.
  3. Follow the state’s annual filing requirements. Not doing so could result in the termination of a corporation, limited partnership or limited liability company. While these entities generally can be reinstated within a statutory time frame, this is a problem you want to avoid.
  4. Maintain separate business and personal bank accounts and credit cards.
  5. File separate income tax returns, with the exception of single-purpose entities where the business income can be filed as part of your individual tax return.

Following these simple steps will help protect your assets. One tactic often used when a lawyer brings suit against a business is to attempt to “pierce the corporate veil” – a term meaning that the litigation is seeking personal assets to satisfy business liabilities. However, if you follow the strict rules of maintaining a corporation, limited partnership or limited liability company, your personal assets should be adequately protected.

Failure to follow even one of the above steps can be disastrous. Although court decisions that actually pierce the corporate veil are somewhat rare, the consequences can be devastating.

Individuals continue to neglect these minimum requirements to maintain their business as a separate legal entity because of the rush of time and the other demands. Taking the extra time and effort is well worth it, however, to ensure that your personal assets are protected from being used to satisfy business liabilities.