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How to Protect Your Business From Personal Legal Trouble Without taking the proper steps to protect your company, you could be putting it at risk in the event of personal issues like a divorce or a car accident. Here are steps to help you plan ahead.

By Mark J. Kohler

Opinions expressed by Entrepreneur contributors are their own.

Recently, I had a client get in a car accident that was clearly his fault. The other driver and passengers were seriously injured and the claims are going to be in the hundreds of thousands, if not millions. What makes the situation more precarious is that my client owns a successful business, a few rental properties and a personal home with equity in it. Regrettably, he and his wife had not taken steps to protect their wealth in the past because they didn't think something like this could happen to them.

In Part I of this series, I discussed the liability created by our business operations and our effort to protect our personal assets. Now I want to discuss the liability created by our personal actions that could threaten our business or assets. I call this "outside liability," or issues like car accidents, divorce and personal lawsuit claims outside of our business operations that could allow a creditor to attack our business or its assets.

Here are three steps to help you protect your hard-earned business and assets from personal issues:

1. Create a financial statement of all your company's assets.
This doesn't need to be complicated or require the assistance of your CPA. Simply list out all of your assets, including your business, and their fair market value such as rental property, equipment, stock, mutual funds and your home. Then in a column next to the values, list any applicable debts secured by these assets such as mortgages, home equity lines of credit and loans attached to a specific piece of equipment. This is important in order to evaluate what equity in various assets are exposed.

Related: Where Small Businesses Are Finding Money (Infographic)

2. Determine what protection is available in your state based on your entities.
How well protected your business's wealth is may very well depend on what state you live in. While many people think they protect their rental property when they put it in a limited liability company (LLC) or a limited partnership (LP), this really depends on your state of residence. For example, approximately 13 states have LLC Charging Order Protection, which allows you to protect property, equipment or business assets that are held inside an entity such as an LLC. Essentially, this form of protection would not allow a creditor to foreclose on or dissolve the entity to get at the property inside the entity itself. Because of its limited availability, some people can be tempted to set up entities in other states such as Nevada, Wyoming or Delaware where charging order protection exists, but be wary because scams abound.

On the other hand, more than 40 states have LP protection, which provide this same charging order asset protection, but also involve tax ramifications of holders of certain types of property in an LP versus an LLC. This is an important consideration and strategy that requires a consultation with an attorney and tax professional.

Similarly, currently 12 states provide domestic asset protection trusts, which provide long-term protection for all sorts of assets from a personal residence, business, rental property or stock brokerage account, creating a significant barrier from potential creditors. You don't need to file a separate tax return or a gift tax return when transferring property into a DAPT and they are relatively affordable and easy to maintain, without conflicting with your estate plan. Setting up this type of trust will require the help of an asset protection attorney.

Related: How Incorporating in Delaware or Nevada Can Hurt You

3. Get a quote for umbrella insurance coverage.
This type of insurance will cost an average of $300 to $500 a year for $1 million to $2 million of coverage and will provide a layer of insurance protection over your assets for liabilities created by personal actions. This insurance is separate from your home, auto or business coverage and can give a creditor a target to minimize the risk of losing your business assets.

While it can help in situations like an accident, typically umbrella insurance doesn't cover fraudulent, criminal, reckless or even negligent action, which is why considering a comprehensive asset protection plan that includes more than simply insurance is important.

If you are just starting to build wealth and really don't have any assets, don't stress. Too many Americans get oversold and scared into implementing unnecessary plans. Moreover, make sure you use a licensed attorney for your planning and stay away from the scams in this area of the law.

Time will only tell what the end result will be for my client. They had an Umbrella Policy and hopefully their insurer will help cover some of the claims. However, had they had more of their properties and business assets tied up in entities and trusts like the ones described above, they'd be in less danger of losing their business's assets.

Related: Quick Guide to Reduce Insurance Premiums and File Effective Claims

Mark J. Kohler

Entrepreneur Leadership Network® VIP

Author, Attorney, and CPA

Mark J. Kohler, a certified public accountant in Irvine, Calif., is a partner in the accounting firm Kohler & Eyre, and the law firm Kyler, Kohler, Ostermiller, & Sorensen LLP, specializing in business, estate and tax. He is the author of The Tax & Legal Playbook and What Your CPA Isn't Telling You from Entrepreneur Press.

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