Protect your Business, Assets, and Ownership Interest

The holiday season can be the most wonderful time of the year especially if you are a business owner. Whatever type of business you own, the holiday season can help your business increase its annual revenue. And, as revenues increase and business grows, so does the need to protect your assets.

Protect Business Assets

If your business is sued, the court could order your business to pay the person who sued it a large amount of money. If your business cannot pay, assets owned by your business, such as equipment, inventory, real estate, accounts receivable, furniture, and more could become the property of that person. Losing these assets could put you out of business. Thus, protecting business assets plays a critical role in business planning.

To protect business assets, your business could pledge the assets as security for a business loan, mortgage, or line of credit. Any person who wins a lawsuit against your business would have to pay back that loan before taking ownership of your business assets. The money your business received from the loan could also be protected by depositing it into an annuity, life insurance policy, or other creditor-protected asset.

For example, Holiday Pastries, Inc. owns its corporate office building. Concerned about potential lawsuits, Holiday Pastries takes out a loan from ABC Bank using the building’s equity as security for the loan. Sally sues Holiday Pastries and is awarded a large judgment. For Sally to obtain the building as part of the judgment, Sally would have to first pay back the loan to ABC Bank.

Your business can also protect its account receivables by borrowing against the receivables and putting the money into a non-business account. Thus, the receivables become unreachable to creditors.

Protect Personal Assets

When a corporation is sued, its owner’s personal assets are protected. But, what if you, as a business owner, personally guaranteed a business debt that cannot be repaid by the business? Then you can be sued personally and your personal assets could be used to satisfy business creditors.

For example, Stan personally guaranteed a five-year lease to rent space in a shopping center to open Gifts, Ornaments, and Décor, Inc. After one year, the business closed and could not pay the rent. The shopping center sues both the business and Stan personally. If Stan loses the lawsuit, Stan may have to pay the shopping center its rent from his personal assets.

Protect Ownership Interest in Your Business

If you are sued personally, you could lose the stock you own in your corporation. If this happens, then the person that sued you could become a majority shareholder and take control of your company.

A limited liability company (LLC) may offer the best protection for business ownership. If you are sued personally, then a person with a judgment against you cannot take your ownership in the LLC. Instead, the person can only receive a “charging lien” against any distributions the company makes to you.

For example, Wrap & Bows, LLC’s owner, Lucy, is personally sued and is ordered to pay a large amount of money to George. George cannot take Lucy’s ownership in Wrap and Bows. George can only receive money that Wrap & Bows distributes to Lucy. If Wrap & Bows does not distribute any money to Lucy, then George receives nothing.

Protect your business, assets, and ownership interest by understanding, recognizing, preparing, and compensating for events that could subject your business or personal assets to creditors.

Lake Mary Life Nov/Dec 2008

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