Whether you’re just launching your start-up or finalizing your expansion plans, it’s important to take steps to safeguard your business and your wealth. Many entrepreneurs put their personal assets at risk by not ensuring they have adequate protection. Here are 3 essential ways to safeguard both your business and your wealth.
1. Choose the Appropriate Entity Type for Your Business
Running your venture as a sole proprietor is the simplest and least expensive way to get your business up and running. But going this route will leave you personally liable for damages in a potential lawsuit, or if creditors come knocking at your door. This means that your personal assets, like your home, your investments and your personal property, are all exposed.
Forming an LLC or incorporating your business will protect your personal assets. Under these entity types, you would only be responsible for the amount you invest in the business.
Deciding whether to form an LLC or incorporate can be a difficult decision, and one that you should discuss with your partners as well as an attorney. But if your business involves potential liability, you will most certainly want to avoid taking the risk of running as a sole proprietor.
If an LLC or a corporation is not the right choice for your business and you plan on operating as a partnership, you’ll want to make sure that you have a written partnership agreement in place. A partnership agreement will include the responsibilities and the rights of all partners involved, and will address “what if” scenarios.
2. Keep Your Personal and Business Assets Separate
One of the best ways to protect your personal assets is to keep them separate from your business assets.
The business should have its own bank account and credit cards which are completely independent of your personal accounts. Avoid using company funds to pay for personal expenses and vice versa.
3. Consider Signing a Prenuptial Agreement
Prenuptial agreements are a controversial topic, but they provide an effective way to safeguard your personal assets in case of a divorce. They also allow you to protect your share in the business.
“While it may be difficult to ask your future spouse to sign a prenuptial agreement, it is a highly effective way to protect your business assets, your partners and your employees in case of a divorce,” says Brad Micklin, a New Jersey-based attorney who specializes in divorce cases.
Even if you’re single right now and marriage is the last thing on your mind, your future spouse may be entitled to at least half of your company’s appreciation value over the course of the marriage.
In a divorce, both assets and debts are divided, so if your spouse has a significant amount of debt, creditors could potentially go after your business even after the divorce is finalized.
A prenuptial agreement will safeguard your business assets from these creditors. You may also ask your future spouse to sign a waiver of his or her interest in the business as well as a provision that would require shareholder approval for any transfer of shares to the spouse.
Choosing the right entity type, keeping your personal and business finances separate, and signing a prenuptial agreement can help you safeguard your business and your personal wealth. Whether you’re facing a lawsuit, creditors or divorce, these three measures will work to limit your personal liability while protecting your partners and employees.