Opinion
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Formal business entities provide additional liability coverage
So, clearly, in order to fully protect your business and personal assets, you need more than insurance. You need to take steps to place assets beyond the reach of your creditors. One of the most important steps to take is to conduct your business in a manner that separates business assets from your personal assets.
You have a variety of options when it comes to structuring your business: sole proprietorship, partnership, C corporation, S corporation and limited liability company (LLC).
Choosing the structure
The best way to protect your personal assets from the reach of business creditors is to operate your business as an LLC or as a corporation.
While both can be effective to shield your personal assets from business creditors, the LLC has some advantages in terms of simplicity and flexibility. Of course, the best structure for your business turns on many complex and personal factors, so your best bet is to use this information as a starting point for a conversation with a business advisor, such as an attorney or accountant.
Avoid undoing your careful planning.
While forming as an LLC or a corporation generally protects your personal assets from business creditors, it’s easy to trip up and cost yourself this protection. How? A common mistake is to personally guarantee a business debt or obligation. A creditor can go after any co-signer. As a result, your personal bank account could be tapped to pay a business debt. You must keep a wall between your business and personal life, if you want business creditors to do so.
Actively managing finances to preserve your wealth
Once you have a structure in place that protects your personal assets from your business creditors, you’ve made significant progress, but you may want to consider an additional layer of protection for your business. Why? Because, it is the owners who enjoy limited liability from business creditors: the business can lose everything it owns. In order to protect as much of your wealth as possible, it’s best to have as little invested and maintained in the business as possible. You can manage this by strategic funding and structuring and by careful planning of day-to-day operations.
Holding companies and operating companies.
One of the tried and true ways to thwart creditors is to structure your business using two entities: a holding entity and an operating entity. As the names imply, the “holding entity” holds the title to the business assets, leasing or loaning them to the “operating company,” which conducts the day-to-day business. Yes, all this does sound complicated. However, if you have a highly successful business or a business that has significant exposure to lawsuits, such as a restaurant or construction company, the initial aggravation and cost will reward you with substantial peace of mind over the long run.
Conclusion
No one of these asset protection strategies is enough to protect you and your business, should something go wrong. But combined together, these strategies can offer almost impenetrable protection to the business owner who legally operates a business—and who makes these preparations in advance.
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MA (Oxon), MPhil, PhD
Chief Economist
Julian joined Cavendish Maxwell as Chief Economist in January 2019. Coming from an old real estate family in Ireland, his career as an economist began with a first-class honours degree in philosophy, politics and economics at the age of 19, following which Julian was an analyst with the UK Government. He later helped develop and launch the UK’s residential forecasting service with the firms that merged to become Global Insight. Julian subsequently developed derivatives in the City of London and established real estate futures contracts for what is now the International Commodity Exchange. He also ran a property development and management firm, before eventually serving as an international consultant and trainer to governments, central banks and notable firms including AXA, Citibank, DBS, Deloitte and Thomson Reuters.
Julian fills his work-free time with academic pursuits; he holds several postgraduate degrees, including a PhD in International Risk Management Policy, and also the Licensed Conveyancer qualification. Julian has published many business and academic texts and articles, and is also a keen walker – especially fond of the Scottish Highlands.
Sarah-Jane Carter
BA (Hons) DipM
Head of Marketing
Sarah-Jane joined Cavendish Maxwell in January 2020 as Head of Marketing and is responsible for the development of the marketing strategy and execution across the Middle East region. An energetic and results driven marketer, Sarah-Jane possesses a wealth of multi-channel marketing experience, within both B2B and B2C environments which she has gained over a 25 year career. Prior to joining Cavendish Maxwell, Sarah-Jane held senior marketing positions for major developers in Dubai including Emaar, Dubai Properties and Dubai Sports City. She also worked for IWG as the Regional Marketing Director responsible for the MEA and APAC regions. Before relocating to the UAE in 2005, Sarah-Jane held various management roles in public and private sector companies in the UK including ten years at Royal Mail and seven years at the Bank of America.
Sarah-Jane is a member of the Chartered Institute of Marketing and has a BA(Hons) Degree in Business and Marketing