Economy is a risky business. Your business in a shaky economy is an even riskier business. With today’s unstable markets, which can affect everything from the stability of a dollar on the macro scale to the stability of your business balance books on a micro scale, business owners must carefully plan to protect not only their business assets but also their own personal property.
Your business is not you. Your business is a completely separate legal person that has nearly all the same rights as you yourself have. You are two different individuals, but you are connected in several ways. You make decisions that affect the well-being of your second “legal” half and you benefit when your business benefits. This does not mean, however, that your personal well-being needs to be connected to your business to the extent that when your business suffers, your personal property also suffers (though it is often the case when proper care is not taken to protect personal property of the business owner).
How do you like this scenario? You register a new business, take out a $250,000 loan from your bank to finance it. While you vigorous build your business and operations plans, rent an office and start serving your new clients. Then suddenly, there is an economic downfall.. People lose their consumer confidence, your client base inevitably shrinks, and your business falls apart due to its inability to compete with the bigger and more adaptable companies. Your bank asks you to pay your loan, but you are not able to. The bank files a lawsuit against your company and… YOU personally! The court rules that you, as personally liable, have to liquidate your personal assets in order to pay the loan… Not a pretty scenario, but sadly too common for small business owners.
Small business owners are personally liable for non-payments, tax liabilities and malpractices (among others) of their own businesses. The good news is that being comfortable with the worst case scenario is not the only option. Steps can be taken to protect your personal assets from being seized in case your business gets into trouble. What can be done?
1. Keep a Balance Sheet by generating and regularly maintaining a complete inventory of your assets and debts. Include all assets that you can think of (be it your home, your boat, your investments, your retirements plans, your life insurance, etc.). This can easily be done in Excel spreadsheet by using simple formulas for calculating the totals for Assets and for Debts, and comparing them.
2. Never become a Personal Guarantor for your Business. From time to time, a financial institution or a vendor may require you to become a personal guarantor of your business when opening an account or conducting some other business transaction such as entering an agreement. Remember that personal guarantors are personally liable for the debt that their business is incurring. Once you become a personal guarantor, the protection that your company affords you is gone and you are exposed to creditor’s law suits. If the bank insists, then try to minimize the impact by negotiating a time limit on your guarantee or by specifying a particular asset as collateral to limit what creditors can sue you for. When it comes to suppliers, there is always a competitor of a supplier who offers better terms, including “no personal guarantee” clause. There are plenty suppliers which means that their supplier confidence is usually not overly high, and you can take advantage of this.
3. Have a Lawyer Review your Contracts. It’s true, your company affords you some protection. However, in cases where there is a claim for fraud, you may be personally liable as the company’s director or officer. Your lawyer should draft any contracts that your company prepares and review contracts that your company signs with the view of ensuring that there is always liability protection accounted for. Further, all contracts that your company signs must be signed by on on behalf of your company, not by you personally. This is how a signing clause should look:
John Smith, President
I have authority to bind the Corporation
4. Insure your Assets. No matter how much protection you create to guard your assets from being seized, an unhappy creditor will most likely still include your personal name in their claim because there is always a chance that something was missed or that some legal precedent exists that will force the judge to rule in their favour. To guard against situations like this, get liability insurance protection. Normally, liability insurance protects assets against damages for personal injuries and property damages caused by others. Have your lawyer to review the insurance policy to ensure that you are getting the best possible coverage.
If you are thinking of starting a business, contact us for ways to register your new company. We offer outstanding customer service and excellent results!