Top Asset Protection Mistakes Business Owners Make — and How to Avoid Them

As a business owner, it’s crucial to take precautions to safeguard your personal wealth and protect your business assets. However, many business owners fail to implement the necessary asset protection strategies, leaving their assets exposed to creditors, lawsuits, and liabilities. Not only is having an asset protection strategy in place vital to shield the company you worked so hard to build — but also to ensure you leave the legacy you wish to provide for your family.

The following are some of the most common asset protection mistakes made by business owners:

Failure to Separate Business Assets and Personal Assets

One of the most common asset protection mistakes business owners make is failing to separate their business assets from their personal assets. This can allow a business creditor to “pierce the corporate veil” and pursue your personal assets to satisfy business debts or judgments. Commingling finances could result in losing the liability protection offered by your business structure — and leave your personal savings, investments, real estate, and property exposed to risk. Be sure to maintain separate accounts and keep accurate financial records.

Choosing the Wrong Business Structure

Choosing the right business structure should be a priority for every business owner. Each type of structure offers different liability protections, and it’s essential to select the entity type that meets your objectives. Notably, a sole proprietorship offers no asset protection because there is no legal distinction between the owner and the business. This means you would be personally liable for all business debts and legal judgments. More advantageous asset protection strategies can include forming an LLC or a corporation, both of which create a separate legal entity for the business. It’s important to discuss your options with a skillful business attorney who can best advise you regarding the structure that will meet your needs.

Not Using Trusts for Asset Protection

Trusts are a legal tool that can be used to ensure personal and business assets remain separate, and are shielded from creditors and lawsuits. Specifically, an offshore asset protection trust can protect your assets from litigation, creditors, and other business-related liabilities. Since they are set up in foreign jurisdictions (such as the Cook Islands or Nevis) and governed by the country in which they are created, they often serve as a deterrent to potential litigants who would otherwise initiate a lawsuit.

Ignoring Tax Implications

Ignoring tax implications can weaken asset protection strategies for businesses. Failure to make the correct tax elections or file taxes properly can trigger IRS scrutiny and result in penalties. In addition, disregarding tax formalities or transferring assets to avoid tax liabilities can potentially cause the corporate veil to be “pierced”— leaving your personal assets exposed.

Operating without the Necessary Insurance

Many business owners think that their business entity alone will provide the liability protection they need, so they fail to purchase insurance. While an LLC can shield your personal assets from business liabilities, it does not protect your company’s assets in the event of a lawsuit, negligence claim, or professional error. Operating your business without insurance is a costly mistake that can place both your personal and business assets at risk. It’s vital to have sufficient coverage — including liability, property, and cyber insurance. Review your policies on a regular basis to ensure they reflect your current risk levels.

Waiting Until it’s Too Late to Put an Asset Protection Strategy in Place

It’s not uncommon for business owners to wait until a lawsuit is imminent to put asset protection strategies in place. However, once litigation has commenced, it’s too late. A court may consider a transfer of assets at the last minute to constitute a fraudulent transfer, and void it. It’s best to plan early to protect your assets and avoid complications.

Not Working with a Knowledgeable Asset Protection Attorney

With so much on the line, it’s critical not to take a DIY approach to implementing asset protection strategies for your business. This can lead to legal errors, ineffective business structures, and improper separation of personal and business assets. You could also inadvertently make a fraudulent transfer or overlook vulnerabilities. A skillful asset protection attorney can work with you to create a comprehensive plan that will prevent pitfalls and ensure your assets are adequately safeguarded.

Contact an Experienced California Asset Protection Attorney

If you’re a business owner, it’s important to have asset protection strategies in place to protect both your personal and business assets. At White & Bright, LLP, our attorneys provide trusted legal services to business owners in California for asset protection matters. We welcome you to contact us online or call us at (760) 747-3200 to schedule a consultation.