Asset loss can be a genuine risk for businesses and their owners. Depending on how your business is structured, your company and personal assets may be seized if your business is facing a lawsuit. Even if you’re not at risk of litigation, your assets can also be taken due to creditor actions in a bankruptcy filing. However, that’s not to say that you can’t take particular measures to protect your assets. As a business owner or shareholder, you might be able to take some of these asset protection actions:
Use An Offshore Trust
By visiting a business lawyer website like blakeharrislaw.com, you can learn all about the value of offshore trusts for protecting your assets from lawsuits and creditors. Offshore trusts are beyond the reach of government agencies and national courts, meaning you may not have to lose your assets like you expected to.
Depending on their needs, US citizens have many different offshore trust location options, including the Bahamas, Cayman Islands, Cook Islands, and Belize. The location you choose can depend on your goals. For example, you might create an offshore trust in the Cook Islands if you want spendthrift provisions or bankruptcy protection. Belize and the Bahamas might also be worth exploring if you seek self-settled trusts.
Explore US-Based Asset Protection Trusts
While not always guaranteed protection, asset protection trusts are worth exploring when you want to protect your assets from creditors. Many states offer this trust type as a way to put assets out of reach of most creditors.
Once a portion of your assets are in the trust, an independent trustee is in charge of them. You can also receive distributions from the trusts. However, this trust type has a few requirements for eligibility, including:
- Having a spendthrift clause
- Being an irrevocable trust – moving the assets from the grantor’s control to a beneficiary
- The trustee is in the same state
- The trust assets, documents, and administration are located in the trust’s state
Establish a Limited Liability Company (LLC)
Business owners have many entity options when setting up their business for the first time, like sole proprietorship, partnerships, and corporations. A limited liability company (LLC) is undoubtedly one of the most popular. That’s because forming an LLC separates the shareholders from the business. The entity has its own responsibilities and liabilities, which can differ from those of the shareholders.
If the company is under threat from creditors, the assets of the shareholders can’t be used to satisfy their debts. The loss is limited to what was actually invested into the business. That’s a general rule, but it’s by no means set in stone. If a shareholder co-signs a loan, their assets can be at risk. Courts can also pierce the corporate veil. This means they can disregard the company’s limited liability status and make the shareholders liable for its debts.
Reduce The Risks of Being Sued
You might be looking for ways to protect your assets from lawsuits, but it doesn’t hurt to know how you can reduce the risks of being sued in the first place. One such way could be mandatory arbitration. Arbitration is an alternative dispute resolution method where all parties involved meet with a qualified arbitrator. Just like in the courts, outcomes from arbitration are legally binding.
If you fear your own employees suing you, you might be able to include mandatory arbitration as a clause in their employment contract. If issues can be settled outside of courts, you might stand a better chance of keeping your assets safe.
Explore Equity Stripping
Equity stripping describes reducing equity in an asset. With all the equity removed, your assets can be less desirable to creditors wanting money to cover your business debts. This asset protection practice involves a third party having a claim against an asset, but the owner retains control of cash flow and the asset’s use. In most situations, people using equity stripping to protect themselves from creditors will take out a loan against their asset’s equity and put the funds in a protected trust.
Protecting your assets from lawsuits and creditors can be challenging, but it’s worth putting in the effort when a great deal of money can be at stake. Whether you’re worried about lawsuits or simply want to futureproof your assets, you might like to explore some of these asset protection methods above.
