Protecting Personal Finances From Business Creditors By Karin Price Mueller
You don't need to open an offshore bank account to protect your personal finances from business creditors. Hopefully, your business won't be the target of a lawsuit or be at the mercy of lenders who say you owe them money. But it can happen, and the best protection is to be prepared. Here's a primer to make sure your personal finances are protected from anyone with an eye on your business.
Structure Your Business - The easiest way to protect your personal finances from business creditors or from company related litigation is to create your company as a separate legal entity.
Limited Liability Company - An LLC is the most simple and flexible business entity choice. Structured with some characteristics of corporations, partnerships and sole proprietorships, an LLC will, as the name states, provide limited liability to the owners. To create an LLC, visit your state's office of the Secretary of State or the Treasury. You'll select a name for the LLC, file the required paperwork and pay the fee usually between $100 and $800, depending on the state.
S Corporation: Like LLCs, S corps so named for Subchapter S of Chapter 1 of the Internal Revenue Code allow for pass-through taxation of income and losses for federal purposes. Also like LLCs, S corp owners are typically not held personally responsible for the debts or liabilities of the business.
Your LLC or S corp will receive its own Federal Tax Identification Number (TIN), so your Social Security number should not be linked with business accounts. "Deposit all business receipts and pay all business expenses only with the business account, and never pay personal expenses using the business account," says Jones. For a sole proprietor or single-member LLC using a Social Security number, consider using a "doing business as" name for the business, Jones says. When you create your company, pay special attention to situations in which state law may disregard your corporate entity, therefore exposing the owner's personal assets. Typically, cases involving fraud, the co-mingling of company and personal assets, or using corporate assets for personal use (such as paying personal bills from the corporate account) could lead to trouble.
Bankruptcy - If a business goes belly-up and files for bankruptcy and it has been structured as a separate entity, an owner's liability should be protected. Many business entities will first file a Chapter 11 bankruptcy (reorganization). Once the bankruptcy petition is filed, an "automatic stay" prevents creditors from attempting to collect from the business, and the business falls under the bankruptcy court rules, Jones says.
"The goal of the Chapter 11 reorganization is for the business and creditors to negotiate a plan to provide payment to the creditors and allow the business to emerge from bankruptcy and continue to operate,' he says. "If a feasible plan cannot be formulated, the bankruptcy court will oversee the orderly liquidation of business assets and payment of creditors."
If you as the owner have signed any personal guarantees, the business bankruptcy will not protect your personal assets. You may be forced to declare bankruptcy, too. If it comes to that, at least your retirement assets should be safe. So-called qualified plans, such as 401(k)s, are protected in bankruptcy under federal law up to $1 million. Check your state laws to determine IRA protections.
Think About Your Spouse - Many business owners decide to place ownership of assets in their spouse's name because they think it will provide some protection for the business owner. Sometimes it does. Other times it causes more problems. Like in the case of divorce. If you're not married yet, it may be wise to consider a prenuptial agreement, Batman says.
Have the Right Insurance - There are several kinds of insurance coverage that can protect both your personal and business assets.
* Umbrella liability coverage: This type of plan often has a business exclusion, but if you're ever sued and named alongside your company for negligence, it may protect you.
* General premises liability coverage: If someone falls in your store or office, this will protect the business.
* Ask your insurance pro: Your company may qualify for "errors and omissions" or "directors and officers" coverage, which would protect your business and its employees under a range of legal challenges.
Karin Price Mueller is an award-winning personal finance and consumer writer from New Jersey. She's a columnist for The Star-Ledger and regular Entrepreneur.com contributor. You can read her work at www.KarinPriceMueller.com