Owning a business can be a highly rewarding and profitable venture if handled correctly, but it also comes with risks. In the increasingly litigious society that we live in, businesses are faced with more claims and lawsuits than ever before. As a business owner, it is your responsibility to understand the many risks which face your business and personal assets, and take the necessary steps to protect them.
In this article we will outline the importance of asset protection and some of the best asset protection strategies that can be used.
Asset Protection in Business
Businesses face a variety of potential risks in the forms of legal disputes, bankruptcy, creditor claims, employee negligence, and so on. Some of these risks are obvious, but many are not widely known, or overlooked.
Having a comprehensive asset protection plan in place is vital to ensure the continued longevity and success of your business, and protect both the business and you from the risk of losing your valuable assets.
These strategies employ various financial vehicles and tools to effectively safeguard you from risk. It is of utmost importance that a comprehensive asset protection plan is established before you are faced with a lawsuit or other issue, as it is much more difficult to protect your assets in retrospect.
Types of Business Assets
Business assets fall into two main categories: tangible and intangible. Tangible assets are physical items with monetary value. These include:
- Real estate
- Equipment and machinery
- Inventory
- Vehicles
- Cash and investments
Intangible assets lack physical form but hold significant value. Examples are:
- Intellectual property (patents, trademarks, copyrights)
- Brand reputation
- Customer relationships
- Trade secrets
- Goodwill
Both types of assets require protection strategies tailored to their unique characteristics. For tangible assets, insurance and proper titling are often key. Intangible assets may require legal protections like patents or non-disclosure agreements.
Types of Claims
There are two main types of claims that may be made against your assets through the course of running a business, and the main distinction lies in whether these claims are against only your business assets or extend to your personal assets too. The two types of claims are categorised as:
- Internal claims: internal claims are those which are limited to the assets held by the business entity itself. These claims cannot extend to your personal assets. An example is if you own an LLC, and someone suffers an injury whilst on the LLC property. Assuming this injury was not caused by any personal negligence on your part as an individual, a claim can only be made against the assets of the LLC itself, and your personal assets remain safely at arm’s length.
- External claims: External claims are not only limited to the assets held by the business, and can extend to your personal assets. An example would be if you negligently cause harm in your personal capacity while you are conducting business activities, a claim may be made against your personal assets in addition to those held by the business.
It is important to understand the different types of claims that can be made against your business and personal assets and how such claims might arise, so as to be able to adequately plan and protect yourself.
Wealth Protection Entities for Corporations
There are multiple tools and strategies you can use to protect both your personal and business assets. It is usually better to employ various strategies alongside each other so as to have a wholistic and integrated strategy that can protect you from various types of risks.
The exact tools and techniques which are best for you will of course depend on your own circumstances, type of business, financial capacity, and objectives. Here are some of the most widely used and effective tools and strategies:
Separate Your Business and Personal Wealth
The most important feature of a business asset protection plan is to establish complete legal separation between your personal and business assets. This means that you should elect to establish a business entity which offers limited liability protection.
The two most popular choices are a corporation or limited liability company (LLC). Corporations are best suited to larger businesses with many shareholders, while LLCs are generally preferred by smaller business owners.
Both of these business types are seen as separate legal entities, which means that claims cannot be made against the owner’s personal assets in order to settle an obligation of the business itself, except in exceptional circumstances.
Other types of businesses which serve the purpose of protecting your personal assets include S Corporations, General Partnerships, and Limited Partnerships.
Use Asset Protection Trusts
Trusts are a highly effective asset protection device when used in conjunction with a limited liability company or corporation. The ownership of the LLC or corporation can be transferred to an irrevocable asset protection trust, with you naming yourself as manager of the LLC.
This allows you to maintain control over the assets in the LLC and the day-to-day business activities without having direct ownership. This creates a multi-layered asset protection strategy which creates even greater separation between your personal assets and those of the business.
Title Holding Trust
A title holding trust works in a similar way to an asset protection trust, except instead of the trust owning the entire LLC, the title deeds of specific pieces of valuable business property are transferred to a title holding trust (e.g., business equipment or real estate).
You will remain the beneficiary of the trust, while designating a trustee to hold the title of the property in the trust. You as the beneficiary effectively remain in control over the assets as you can manage the trustee to act on your behalf.
This obviously creates additional layers of legal protection as well as the element of privacy, as your personal name is not recorded in association with ownership of the property, but rather the name of the trust itself appears on the title deed.
Establishing IRA Protections
Individual Retirement Accounts (IRAs) offer valuable asset protection benefits. Federal law provides strong protection for IRAs in bankruptcy proceedings, shielding up to $1,512,350 as of 2024.
State laws may offer additional protections for IRAs outside of bankruptcy. Some states provide unlimited protection, while others set specific dollar limits.
To maximize IRA protections:
- Keep retirement accounts separate from other assets
- Avoid commingling funds or making prohibited transactions
- Consider converting traditional IRAs to Roth IRAs for enhanced creditor protection
Strategies & Things to Consider
Utilizing Buy-Sell Agreements
Buy-sell agreements protect business owners in case of unexpected events like death, disability, or departure of a partner. These contracts outline how ownership shares will be transferred and valued.
Key components of buy-sell agreements:
- Triggers for buyout (e.g., retirement, death)
- Valuation methods for the business
- Funding mechanisms (e.g., life insurance)
These agreements ensure business continuity and protect remaining owners from unwanted partners or heirs taking control.
Implementing Succession Planning
Succession planning is crucial for long-term asset protection. It involves preparing for leadership transitions and ensuring the business continues smoothly after key personnel depart.
Effective succession planning includes:
- Identifying and training potential successors
- Documenting critical business processes
- Establishing clear roles and responsibilities
A well-crafted succession plan minimizes disruption, maintains business value, and protects assets during ownership transitions. It also helps avoid potential disputes among heirs or remaining partners.
Strategic Asset Allocation
Effective asset allocation enhances a company's competitive position. Identifying core assets that generate the most value is essential. These may include proprietary technologies, customer relationships, or specialized expertise.
Prioritizing investments in these critical assets ensures optimal resource utilization. Regular asset performance reviews help identify underperforming assets that may need reallocation or divestment.
Diversification of assets can mitigate risks and create new opportunities. This may involve expanding into new markets or developing complementary product lines. Strategic partnerships or acquisitions can also provide access to valuable assets and capabilities.
Protecting Trademarks and Patents
Trademarks safeguard brand names, logos, and slogans that distinguish a company's products or services. Registering trademarks with the appropriate authorities grants exclusive rights to use these identifiers.
Patents protect inventions and new technologies. Filing patent applications requires detailed descriptions of the innovation and its unique features. Granted patents provide time-limited monopoly rights, allowing businesses to commercialize their inventions without competition.
Securing Copyrights
Copyrights protect original works of authorship, including literary, musical, dramatic, and artistic creations. Copyright protection begins automatically upon creation, but registration offers additional benefits.
Registering copyrights provides public notice of ownership and is required before filing an infringement lawsuit. It also enables copyright holders to seek statutory damages and attorney's fees in successful litigation.
Tips to Prevent Lawsuits
In addition to the aforementioned financial tools that can be used to better protect business assets, there are also some important tips to take note of to maximise the protection of business assets:
1. Implement your wealth protection before a claim arises
This has already been mentioned but cannot be stressed enough. In order for an asset protection strategy to really be effective, it needs to be in place long before a claim arises.
The earlier the better. Once a claim against the assets arises, it is often too late to adequately protect your business or personal assets. Assess the risks you might face and put in place the necessary structures today to protect your assets. It is also important to regularly reassess your asset protection strategy and make any necessary changes as your business evolves over time.
2. Apply for all necessary trademarks, patents, and copyrights
Intellectual property theft is rife in this technological age. The IP of a business is often more valuable than its tangible assets, and needs to be safeguarded as such.
Registering your business’ IP will not only protect it from being stolen by others, but will also protect the business from an IP theft claim being made against it. Sometimes IP theft may occur without even being aware of it, so going through the process of registering trademarks and copyrights will help you to discern whether all the IP you have created is indeed original and not already owned by someone else.
3. Ensure adequate internal data protection, confidentiality agreements and privacy
If you operate the type of business where the data has significant value, it is important to make sure there are proper internal procedures in place, including confidentiality agreements, to stop your employees from leaking potentially valuable data.
4. Insurance
Insurance is the most obvious, yet one of the most effective tools in protecting business assets.
Many neglect to ensure that their businesses are adequately insured against all possible risks, but investing in good insurance can be the primary layer of protection your business needs.
Conclusion
Operating a business today may be fraught with risks, but there are sound and effective tools which business owners can utilise to protect both their personal and business assets. It is important to educate yourself about all the potential threats to your business assets, and take the necessary steps today to implement a wholistic asset protection plan.
Due to the complexity of the many strategies and tools available, it is best to consult with an asset protection expert who can help you implement the ideal strategy to suit the specific needs of you and your business.
