Owning a business can be an exciting opportunity, but it comes with certain risks that the business owner needs to be aware of and make contingency plans for. Making a profit is the ultimate aim, but entrepreneurs must also consider how to protect their business and their personal wealth in the event of challenges. Implementing a comprehensive asset protection plan at the start can help protect personal wealth and assets from creditors as well as insulate the business against risk.

Dr Edgar Paltzer deals with wealth management as part of his legal practice and is well versed in asset protection for entrepreneurs. A definition of what wealth management advisory services entail can be found in the PDF attachment to this post.

Asset protection focuses on protecting personal assets from potential business risk, ensuring that only the business is held accountable if something goes wrong, rather than the owner.

Establishing a Business Entity

A key part of asset protection is establishing the right business entity. Setting up as a sole trader often seems like the best options for new entrepreneurs, as it is the simplest way to become self-employed. However, sole traders are afforded little in the way of personal asset protection. If the business attracts liabilities, the personal assets of the owner, including property, vehicles and outside investments, may become collateral that creditors can take. Establishing a limited liability company or even a corporation provides far better protection in terms of personal assets, leaving only the assets of the company exposed to creditors, rather than the assets of the owner.

The embedded infographic outlines some of the most the fundamental types of business entity.

Separating Finances

Once an entity has been established, it is essential to maintain separation of business and personal finances. Any transactions that go through the company should be separately documented and under the company name. This includes having separate bank accounts and cheque books, having property titles in the company name (not the name of the individual), using the company name on any documentation, and keeping strict and comprehensive records of all transactions. Keeping minutes for all meetings can also be useful in the event of an issue arising, as this helps to ensure compliance in the case of an outside review or investigation.

Implementing the Proper Procedures

One of the simplest ways for a creditor to prove liability is if they have evidence that there has been any fraudulent or negligent activity taking place within the business. Ensuring there is no cause for anyone to think this relies on implementing all the proper procedures from day one. Every transaction and business agreement should be laid out in writing in full, including employee contracts, lease agreements, payments records, subcontractor agreements, and formal contracts with suppliers and other third parties. Business owners should never pay cash in hand to employees, suppliers or contractors and should only use professionals with a good reputation.

Purchasing Insurance

Insurance acts as a buffer between the business and creditors in the event that something unforeseen goes wrong, Having the right insurance in place from the start is therefore vital to protect both the company and personal assets in the event of a lawsuit. Umbrella insurance can act as an additional layer of cover.

In terms of business insurance, the best type of cover will depend on various factors, most pertinently whether the business property is owned or leased.