It’s no secret that small businesses are targets for lawsuits. According to NFIB, tort liability (e.g., accidents on premises, discrimination claims by employees) cost small businesses more than $105 billion in 2008 (the latest year for statistics).
Risk management is a vital part of running your business so you can protect what’s yours. Here are 4 strategies you can easily use for this purpose.
1. Incorporate or form an LLC
If you are a sole proprietor, independent contractor, or general partner, your personal assets are at risk. Creditors of the business can seek recovery through your personal assets — your house, your personal bank account, your savings. If you are a partner, you are jointly and severally liable for the debts of the partnership. This means a creditor can seek full restitution from any single partner. That partner can then try to recoup part of the payment from other partners.
Strategy: Incorporate your business or set up a limited liability company (LLC). In this way, creditors of the business can seek recovery only from the business. You can do this even if you are the only owner. There is a state fee involved for this action, and there may be annual state filings and other required actions that entail yearly costs. Learn more about incorporating or using an LLC from BizFilings.
2. Set up a qualified retirement plan
A federal law — ERISA — gives unlimited asset protection to funds in a qualified retirement plan. There may be other protections for non-ERISA plans, such as IRAs and IRA-based plans (e.g., SEPs and SIMPLE-IRAs).
Strategy: When choosing a plan, opt for one protected through ERISA, such as a 401(k) plan. These plans generally entail annual filings with the Department of Labor and reporting to plan participants. Learn more about asset protection through retirement plans here.
3. Insure everything
Chubb’s slogan is “peace of mind.” That’s what you get when you carry the right type of insurance, and enough of it. It also gives you asset protection to the limit of your policy.
Strategy: As a minimum, be sure to carry sufficient liability coverage, which is typically part of your business owner’s policy (BOP). Professionals should carry malpractice coverage. Consider an umbrella policy to add protection on top of existing coverage at a modest cost. Learn more about insurance for small business from Insure U.
4. Spread the wealth
If you’re willing to give up control over some of your assets, you can protect them. As long as transfers are made before you become subject to any creditor claims, nothing stops you from being as generous as you want.
Strategy: You can give property to family members, such as a spouse or children. Property jointly owned with a spouse using “tenancy by the entirety” has strong asset protection. You can also use trusts to add a layer of asset protection.
In the old days, some business owners sought to protect assets by moving them offshore. Now, however, there is strict reporting of foreign assets, making it easier for creditors to find them. Best strategy of all: think about your exposure to creditors’ claims and then work with professionals — attorneys, insurance agents — to decide on the best strategies for your situation.