Are Your Personal Assets At Risk From Your Business?

Whether the economy is still faltering or on the mend, the undeniable truth is that small businesses everywhere have suffered and many more are currently experiencing rough times.  There is a running thread at Chowhound about restaurants closing right here in San Diego, and it’s depressing reading about some well known names that have shut their downs to the public.

Your personal assets may be at risk not just because of lawsuits against your business, but also in bankruptcy.

The Wall Street Journal discusses how in bankruptcies, entrepreneurs often are unaware their personal assets are at risk. Small business owners should be aware of the following risks of certain business structures:

• Sole proprietorship. This is the riskiest form of business to use.  You expose all of your personal property to any type of lawsuit during operation, and in bankruptcy as well, because you cannot file bankruptcy “just for the business” because in the eyes of the courts, there is no separate entity.  The business was never incorporated.
• LLC’s and Corporations.  These structures provide a little more protection, but are not full proof.  Most small businesses do not have enough credit for taking out small loans or signing big leases.  Therefore small business owners often sign personal guarantees for loans or leases.  While this will not expose personal assets to general liability, they may be exposed in cases of bankruptcy or suits related to the loan/lease.  Read more about Personal Guaranty.Also, keep in mind that just forming an LLC or Corporation is not enough.  Formalities must be followed during formation and continual operation of the business, or the limited liability shield may be pierced.  California clamped down on limited liability companies that were not following proper formalities and procedures.

Asset protection works both ways.  You want to protect your personal assets from your business, and your business assets from your personal life.  Proper planning may not eliminate every risk that lies out there, but it may shield your assets from those risks that you can control.