How to Protect Your Personal Finances From Business Risks

You need to be prepared should your company one day be faced with a lawsuit or accident. Here are four ways to make sure your personal finances are safeguarded from business liabilities.

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By Mark J. Kohler


Opinions expressed by Entrepreneur contributors are their own.

One of the most misunderstood concepts in the law, especially for small business owners, is how to protect personal wealth. Many business owners get taken advantage of with high-priced asset protection plans that don't provide the protection they promise. Others avoid the topic and buy more insurance, crossing their fingers that an expensive lawsuit or accident doesn't befall them.

Asset protection is about protecting your personal wealth from the threat of business liabilities, which can be a real danger to both you and your business.

I recently had a client call me frantically because a customer slipped and fell on the way into their office, badly breaking an arm. Luckily, my client had various strategies in place to avoid personal liability, which could have otherwise involved a lawsuit against them personally and the loss of their home or other assets. This is a classic example of why asset protection is so important for your business.

Here are four ways to ensure your personal wealth is protected in the event that your business is held accountable for something gone wrong:

1. Choose the right entity for your business.
While operating as a sole proprietorship may seem like the simplest option when you're just starting out, it certainly isn't your best choice when you're talking about protecting your personal wealth from business liabilities. As a sole proprietorship your personal assets like your home, investments and personal property are completely exposed to a potential lawsuit.

Setting up an entity, such as a corporation or limited liability company will better protect you in the event of a lawsuit. My client had a two-layer approach to his business structure. He operated the business as a corporation and held the building in an LLC. This caused the injured customer to first look to the corporation as a business and then to the LLC as the entity owning the building. With two entities in the mix it made it more difficult for the potential plaintiff to attack my client personally.

Related: The Habits of Self-Made Billionaires (Infographic)

2. Keep work and personal finances separate.
If you have indeed set up an entity, don't think this documentation is enough to save you should a lawsuit come your way. You need to maintain a separate checkbook for your business, use the company name on all documents, title the property in the name of the company if necessary, and most importantly, maintain a corporate book and do your annual minutes.

Don't think you can cut corners just because you filed Articles of Organization for an LLC on the state website or with an on-line incorporation service. You should have all the proper documents for any type of entity and do your annual maintenance religiously by paying the required fees to the state, holding your meetings and keeping minutes. In my client's predicament, we were able to quickly review his company documents and confirm they were in compliance internally and with the state. We didn't want to be in a situation of having to recreate paperwork for the past few years and cook the books.

3. Have proof that you're a stand-up business owner.
One of the easiest ways for creditors of your business to attack your personal assets is for you to act negligently or fraudulently. In my client's situation, he was able to show he had a regular procedure for snow and ice removal and that he did all he could to warn customers about the slippery area outside his business. This is exactly what a judge wants to hear when considering whether to go after a small business owner's personal wealth.

Related: What Employee Stock Ownership Plans Mean For Entrepreneurs

4. Purchase the proper insurance.
Watch out if any so called "asset protection" company suggests you can avoid insurance by simply hiding your wealth or setting up an entity. Insurance is an important part of your business and should be budgeted for from the start. It gives whoever is after your money a target to pursue and can take care of an incident in your business.

That said, make sure you get the correct insurance policy. Depending on whether you own a rental property, professional practice, or retail store, you are going to need very different types of insurance. My client, for example, was able to reach out to two different insurance providers to make a potential claim -- one for the building and one for the business. Don't forget to have an annual review with an insurance agent who can advise you on your options and what policies you may need.

While my client's example was simple, we can all relate to it. The asset protection steps my client took were simple, straightforward and generally affordable. My suggestion is to start with these four steps and get a consultation with a licensed attorney specializing in asset protection and business planning. This will most certainly minimize the personal financial risk you face in the operations of your business.

Related: 5 Personal Finance Tips for Cash-Strapped Entrepreneurs

Mark J. Kohler

Entrepreneur Leadership Network VIP

Author, Attorney and CPA

Mark J. Kohler is a CPA, attorney, co-host of the podcasts Main Street Business and Directed IRA Podcast and a senior partner at both the law firm KKOS Lawyers and the accounting firm K&E CPAs. He is also a co-founder of Directed IRA Trust Company. He is the author of The Tax and Legal Playbook, 2nd Edition and The Business Owner's Guide to Financial Freedom.

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