In today’s uncertain financial climate, is there any way to ensure your assets are fully protected?
Many business owners, and those who may be considering a startup venture, are unaware of hidden risks that can erode or even erase everything they’ve worked for with virtually no warning.
Fortunately, there are simple, practical steps you can take. By having the right protections in place at the right time, you can ensure that your assets and your peace of mind are secure.
Here are the top 6 areas where your assets may be exposed:
Operating your business as a sole proprietorship. In addition to paying higher tax rates in most cases, sole proprietorships are targeted by the IRS for audits more than any other business structure. IRS statistics show that sole proprietorships are more likely to understate income and overstate expenses. This is where many get flagged for writing off hobbies as business expenses. This risk will increase with health care reform and an incoming wave of new IRS agents.
Owning safe assets in your own name. Even though they may have nothing to do with your actual business affairs, any asset held in your own names, such as stocks or precious metals, could be tied up (or lost) in a personal lawsuit. It’s a common myth that living trusts or “dba” operating companies can protect the assets or investments you hold in your own name from liability.
Owning intellectual property in your own name. As with safe assets, holding IP in your own name is also a risky strategy. All the time, materials, and sweat equity you’ve invested in any system, product, or body of work could be taken away from you if it’s exposed to litigation.
Domain names. Many entrepreneurs rely on domain names for a substantial portion of their income streams in today’s internet economy. Even something as random as a liability claim from a car accident could cripple your business if they go after your domain names for recovery. Although it may seem like a simple way to save time and money initially, the worst place to hold domain names is in your own name or the operating name of your business.
The ownership of your current company. Even having a separate entity like an S or C corporation does not guarantee protection for your assets or investments unless you have the proper structural details in place. Many “one price fits all” online incorporation services fail to ask important questions that could mean the difference between security and exposure. Certain high revenue and profit LLCs may be at risk also.
New joint ventures running through your current operating business. There are many reasons why a second or additional entity makes sense as a simple and affordable way to put a firewall around your most important assets and investments. Certain products or services may carry higher liability risks, and there may be separate intellectual property to protect.
Do you see an area where you might be vulnerable? You are most likely on great terms with all your friends and business associates, and you might be thinking that your business is too small to be a target, but consider these sobering statistical realities:
There are nearly 80 million lawsuits filed every year!
Frivolous lawsuits cost the U.S. over $200 BILLION per year!
Internet lawsuits are increasing more than ever before!
As the economy struggles with massive debt, lawsuits will increase to all-time levels coming soon.
Make sure your business is fully protected. The basic incorporation steps required to open a business account with a bank are often not enough to protect your assets from other serious tax and legal risks.
This can be corrected easily and inexpensively in most cases, but the longer you wait, the more the risk goes up.
Go to my company NCP, to learn more about forming a complete formation to ensure your protection.
Investing in a powerful tool and not using the tool properly does not make a lot of sense.
I know when it comes to running a business, it requires multiple hats to wear, and very often, you are off and running on 10 different projects, calls, appointments, presentations…and perhaps the very foundation of your business may be in jeopardy.
Here are the top costly mistakes I have seen made over the past 23 years:
If you started a business in your own name for a few months before you formed an entity, odds are part of what you did you completed as an individual, and you need to connect the dots to the new entity. If you filed a DBA (doing business as) with yourself as the applicant, that needs to be canceled and re-linked to the entity.
That means your entity needs to be the applicant, not you! If you don’t do this, you still are exposed to unlimited liability and filing a Schedule C with higher audit potential. The next point is to open a bank account in the business’s name, not just keep the account in your personal name. Use a business credit card in the entity’s name, not just your personal credit card, and keep track of expenses.
You will want to minimize the amount of debt that shows up in your personal name.
Update all affiliate programs, vendors with your new entity information, so any income is going to your business entity, not to your name personally.
Update your websites, business cards, letterhead with the new name of your business. Another important tip is to make sure your website complies. Most are not. I would recommend www.autoweblaw.com simple software with all the legal agreements you need on your website or blog.
2. Funding concerns. 95% of businesses fail within 5 years, and undercapitalization is the #1 reason.
The pattern I have seen is that small business owners hope for revenue to come in as the primary source of money to grow their business. What happens if your revenues are off or don’t come in at all? You may be working on that great new product, and all your e-mails go out, and no one converts. That is a real problem.
The key is to model success. Almost all successful companies do not use only their own money to grow. I know you know the concept, “OPM,” other people’s money, yet are you doing that? Are you only self-funding your business on your personal credit? Did you know that the business credit bureaus will start creating a file once the entity was filed?
They scan the Secretary of State’s records to create a file with any new filings. They look for the name of the business, the start date, and name of the officers/managers the address…
If you are not paying attention to how you fill out forms with the business address, business license, state forms, you can create disconnects in the database.
In one business credit bureau, NCP has spelled four different ways. The NCP part is the same, but one way has “Inc.,” one has, “Inc.” other has, “Inc” and the last one is “Inc.”
Did you notice the differences between the comma and the period? That created four different files! Don’t make that same mistake.
Unlike personal credit bureaus, business credit bureaus are very difficult to fix any mistakes. They have their own set of rules and are not set up for changes after mistakes happen.
This creates a problem for developing credit for your entity because you basically have one shot at the apple to get it right the first time. Banks and vendors are very interested in the financial strength of your company. Now joint venture partners can check you out for free to determine who is stable in your operation.
You may be losing business and not knowing it. It is really a must to be financially solid in your business, and your developing business credit is a must for your long-term success.
3. Safe and risk assets. Mixing asset classes is a major risk to your wealth that is unnecessary. A risk asset is an asset that would cause liability to your entity. That may be a business, real estate, equipment, again, anything that may cause liability to an entity.
A safe asset is one that does not cause liability to an entity, like cash, ownership of another company, investments…If your business falters and you need to rely upon your safe assets to recover the short term, why unnecessarily put your safe assets at risk? It happens all the time.
4. Not clear on who does what? A partner can help you grow a business quickly and destroy it even faster if you are not on the same page.
Very similar to being married. I have been married for 24 years with three girls, and it is a lot of work and requires meetings and discussions to do the best to be on the same page.
Business like marriage can be very exciting at first, and you really need to communicate well with what you are looking to accomplish. The fun part of the business is discussing how you will bring in revenue and all the possibilities that can happen with profits. The part that isn’t fun is the expense side of the ledger.
First, you must agree upon what is actually considered an expense: do that include cell phones, travel, meals…? What happens if revenues are way off, and there is not enough money to pay each partner, and you need more capital from each partner to keep it going? This can be a very uncomfortable problem.
It is best to presuppose the challenges ahead of time and see if you can calmly discuss them and develop solutions that make sense. If you can’t get to first base on the uncomfortable parts before you get started, that is a bad sign, and perhaps you should NOT be a partner. In fact, odds are the business is doomed to fail if you can’t get through some of these basic uncomfortable discussions from the start. Now, that does not mean your partner is telling their spouse the same story. That can and often does create more issues.
Having as much in writing from the start and a business plan in place makes the most sense. Almost ALL, not all, but close, partnerships that refuse to take the time to put things in writing fail. It is like clockwork. If anyone wants to start a business with you and refuse to put things in writing, run.
Most of the time, the only one that makes money in that situation is the attorneys after the partners sue each other. Take the time to be clear and put it in writing.
A strategic asset protection mindset will separate those who accumulate long-term wealth and keep it. Most successful entrepreneurs let their big egos get in the way, and they don’t take steps to set up a complex (not simple) structure to protect their assets.
A strategic asset protection mindset is part of this important business equation; you must master two skills: first, the skill to generate profits in the shortest period possible and keep them. Many times, keeping them may be harder than creating profits. Keeping them focuses on the strategy of asset protection. You must protect your assets from everything, like lawsuits, taxes, creditors, and bankruptcy.
This success requires a certain mindset for survival. It requires working backward to think through what could go wrong and how your assets would be affected.
You Must Ask Tough Questions
It requires asking some tough questions like, “What would happen if I get sued, and my business insurance (if your business even has any) did not cover the legal fees and damages? What would happen to my financial fortress? If my assets were to take one direct hit (a lawsuit), what would be the outcome? Would I lose everything? How do I mentally handle being totally unprotected?”
Perhaps you have formed a separate legal entity for your business, and a hit at the business level should protect you at a personal level. How do you handle a lawsuit at your business-level where the business has to pick up the tab?
Does Your Business have the Cash Flow for Legal Expenses?
Could your business survive defending a lawsuit that would require a retainer of $20K and $3K a month for 18 months? What would that do to your cash flow? Is there even enough cash flow to handle that extra monthly overhead?
What about an IRS audit? Is your business being operated as a business, not a hobby? What would the IRS discover if they looked at your records? Would there be large holes and gaps in the business records which would lead to huge penalties and interest? How would you and your business handle such an attack?
Here are the key attributes of the asset protection mindset for survival:
Consider the downside first. If you were in the business of setting up firework shows, you would take every precaution and consider what could go wrong to determine the best safety so that no one would be hurt. Are You Negative or Smart? But in most businesses, it could be considered being negative to consider what can go wrong.
I know you do not want to spend all your energy in this space, but it has a vital role in stepping into the consideration as part of your survival plan.
Do You Have a Partner? Business is like Marriage…
This is a must, especially if you have a business partner. You must consider if there is no cash flow to pay yourself, who will personally guarantee the accounts? What legal issues can you create for each other, and how will you avoid them?
In most businesses, the founder gets so excited (similarly to how you feel before getting married) about their great idea and how much money it could generate, how their life would be different…that if you enter the conversation with a point of what could go wrong, or what if that does not work out…you would be considered negative and unsupportive of the idea.
Keep in mind that being positive and excited has its role and is the genesis of most great businesses. At some point, ideally, in a separate meeting, the downside must be considered.
I mean, consider it first, before you open your doors, sign the big lease, and commit your capital. Not that you have to consider everything that could go wrong when an idea comes into your mind, because you would never get started, in that case (that is an entirely different issue).
Want Results? Model Walt Disney’s Approach
The best approach is to model Walt Disney. Walt would conduct a separate meeting to create ideas (the dreaming room) versus evaluating the ideas.
This was key to separate them because the creative and open-ended thinking phases were not the time to evaluate an idea to determine if it would work. That would more than likely stifle the ideas in the first meeting. The same approach works well when it comes to evaluating the downside of a business opportunity. Have fun with the open-ended green light thinking and plan a separate meeting to evaluate the downside or what could go wrong.
The huge mistake is to skip this separate meeting and let your enthusiasm carry you to signing a lease, committing large amounts of capital…
Separate for success. Putting all your eggs in one financial basket is crazy and irresponsible.
It blows my mind that over 67% of all small businesses still operate as sole proprietorships. I realize the pattern that creates that outcome (comes from a tax point of view and belief about the ability to succeed), but it still blows my mind.
Separate Safe and Risk Assets…
You have taken the first step by forming a separate legal entity for your business. Step two is to protect your safe assets from your at-risk assets. That means stocks, crypto, gold, silver, ownership in other companies (this is a big one), artwork…assets that do not cause direct liability.
Did You Protect Your Ownership/Investments in Other Companies?
Why leave any of your assets on the table that is likely to be taken in lawsuits, bankruptcy, or IRS issues? Many will say, “I only have $_____ in safe assets. I do not have enough to protect.”
Do You Have Enough Assets to Protect?
Actually, the less you have, the more important it is to protect it because if you lost $25K, and that represents 100% of your safe assets, that is more meaningful and impactful to you than if you were Elon Musk and got hit with a $10-million lawsuit.
Is the Equity in Your Home Protected Properly?
The next step in asset protection is to protect the equity in your home (if you have any in this economy). Check into your home state homestead laws to find out how much equity is protected.
In some states, like Nevada, $550,000 is protected; and in others, it may only be $5,000 of equity. Florida is unlimited. Next, separate your real estate, both commercial and residential, from your own personal name. Typically, each commercial building (depending on the value and overall percentage of your net worth) would be held by a separate LLC.
Your real estate risk level would depend upon the overall percentage of your net worth, which would be a big part to dictate whether a separate entity should hold each piece of real estate or if you would have 3-4 properties in each LLC.
Your Living Trust Does NOT Protect Your Assets from Liability, But…
Next is to tie in the living trust, as the entities’ owner, for estate planning purposes. This is a critical step to remember. Why protect your assets during your lifetime and, upon your death, leave the state to handle the distribution of your assets? Probate can be costly and take years, in some cases.
Lawsuit Strategy for Survival: Ask questions, understand the challenge, back to work. What happens when you are hit with a lawsuit? The natural reaction is to be upset, frustrated, and mad!
Most Lawsuits Emotional Derail Most Entrepreneurs, this is the Expensive Part
Typically, you were attempting to do good, help someone out, or provide a quality product or service, and an individual or a business did not see it that way. They think that you screwed them over (right or wrong). Now, you are staring down the barrel of a lawsuit.
Even if you feel right up front, this is totally bogus, not right, and should be set aside in court (which is, by the way, the mindset that may get your butt kicked in court).
You May Become Financially Paralyzed
That lawsuit can prevent you from receiving any financing in your business name or personally, depending on who is getting sued. You never want to assume a lawsuit is bogus or will have no merit in court.
You must approach it with 4-5 ways to attack this lawsuit, what you must do to protect yourself, and provide it invalid. You weIt would help if you organized and prepared.
Thinking you have a slam dunk leads to being unprepared and getting your butt kicked.
What You Should Do If You Are Sued…
Here is the best approach for survival if you get sued. First, interview 2-3 different attorneys on the lawsuit and ask a lot of questions.
Ask for their initial opinion, how they would approach it, how long it should take to defend, what stages are involved, how much is their upfront retainer, what are the time requirements involved, what would have to happen for you to lose, to win, can you counter sue, and should you attempt to settle outside of court…
Get Back to Work and Focus on Your Business
Once you get your asset protection mindset around the big picture, all the steps involved, the time frame, and what your game plan will be, then you can take the most important step, focus on your business, and get back to work.
The costly part of a lawsuit can be the profits you lose from your business because you are distracted by the lawsuit. You are up at midnight, upset at the person or company suing you, and thinking, “How can they do this to me after I attempted to do business with them or help them in some way?”
Are You Weak and an Easy Target?
The worst approach can be to let them see you will make no effort to defend yourself because the lawsuit has no merit. That sends a message that you and your company are soft.
I recently spoke to the VP of a $15-billion-per-year company, and the VP told me that they must aggressively go after every lawsuit that hits their company, so they do not appear as a weak and easy target.
The approach is correct. In the end, you have to be prepared to understand the challenge at hand, find out the time frame, issues, and expenses, put it in your budget, and get back to working on profitability. It’s like a military operation.
Expand Your Legal Budget
Again, as you can imagine, most do not handle it this way, and that is why even if you win and your insurance company pays the legal fees, a lawsuit can be financially devastating.
This will help you avoid many legal issues, to begin with. You may often sign an agreement or contract, and you assume the other party has reviewed the agreement.
You should NEVER sign a legal agreement or contract without having an attorney review it. I know it may take two hours to review, and it may be $500 or more for those two hours, but it can be a worthwhile investment in the long run.
Being Cheap can Comeback and Haunt You
Now, if you are opening a brokerage account with a major firm and you want to review it for the sake of understanding what you are signing, that makes sense. But if you think you will make some recommendations for changes to this major firm, that is not happening. Being cheap in this area can come back to haunt you.
Why Partnerships Fail
It does help when you start a new opportunity with another company if their side writes the agreement for you to review; that is much less than you writing the agreement. I have been on both sides. It does depend upon your position of strength in wanting to get the deal done.
If you are working with partners and do not put things in writing, that is bound to fail. This all refers to you really have a legal budget of perhaps $400-$700 per month in place, which may come into play 2-3 times per year.
If your company is much bigger, that number may be huge, especially if you have employees. HR issues can be very costly, and it is best to run it past an HR attorney vs. your buddy, who has 10 years of management experience.
All these areas are key when it comes to developing the best asset protection mindset for survival. When you develop a stronger mindset in this area, take action, and implement the recommendations. If you get hit with a big lawsuit, it will NOT derail your entire business or ruin you personally!
As the end of another year comes to a close soon and you are getting ready for your plans for the new year, you may evaluate all your assets properly protected?
Here are many of the common strategies that often turn into costly mistakes (that you may not have considered):
All your business ventures in one business. Yes, if you are starting and testing 3-4 different revenue streams, that may be ok in one entity but if two or three are really taking off, why put all of that in one business entity (other than it is easier). Would you put all your investments in one stock? Probably not. Why? Too much risk. The same strategy applies to a business (don’t put all your eggs in one basket).
Real estate in your own name (outside your principal residence) even without equity may be a lightning rod for lawsuits, best in a separate entity.
Too much equity from real estate in one LLC. Especially if the equity is a high percentage of your net worth, suppose you have three properties free and clear worth $400K each, which is 80% of your net worth, that makes no sense to have in one LLC. Remember, your living trust does not protect assets from liability.
Business with a partner in the same entity as the operating business you own 100%. At the end of the day, you make your partner owner of your main company, which may not be what you intended.
Holding safe assets or investments (crypto also) outside your retirement plan in your own name/brokerage account or your living trust (remember your living trust provides ZERO liability protection but protection from probate taxes).
Doing business in the U.S. with your home country entity, not knowing that maybe bringing undo liability to your home country business.
It is a great time to form a new complete entity formation (which we do in all 50 states) as you get ready for the New Year.
If you need help to form another entity to protect another business or other assets, see our packages below, including a video overview and pricing. Questions? Email email@example.com. Here are our steps for a Complete Formation for a 50 State Formation.
As we get closer to the end of the year, we may choose to have the IRS start date on the SS4 application to be January 2021 vs. 2020. If you are forming an entity that would trigger a year-end return for 2020.
Feel free to forward to any friends or business associates who may need support to protect their business or personal assets. I really appreciate any help you can provide.
Necessary cookies are absolutely essential for the website to function properly. This category only includes cookies that ensures basic functionalities and security features of the website. These cookies do not store any personal information.
Any cookies that may not be particularly necessary for the website to function and is used specifically to collect user personal data via analytics, ads, other embedded contents are termed as non-necessary cookies. It is mandatory to procure user consent prior to running these cookies on your website.