Are you protected from creditors?

If you own and operate a small business, you should consider whether your business assets and your personal assets are being adequately protected from creditors. 

The first step is evaluating the pros and cons of creating a separate legal entity for your business.  There are various types of legal entities, including partnership, limited liability company, and incorporation.  Each type of entity comes with particular rules/requirements, a default organizational structure, and varying levels of liability protection.  If you meet with an attorney, you can discuss the management and ownership structure which fits your business, as well as the type of liability protection that would best suit your needs.  You should then also consider speaking with a CPA to discuss the tax ramifications of the entity type(s) that you are considering.

Once you have created a separate legal entity for your business, use it. 

You must separate your personal expenses from that of the business.  Failure to do so could also result in a creditor successfully arguing that you and the company are one and the same; and that there never was a separate legal entity. 

So, you must maintain separate bank accounts. 

Any money spent by the company should be for a business expense.  Any deviations from this practice should be well documented.  Examples: if the company is going to own the car that you drive, you should recognize that as a benefit of your employment and the benefit should be acknowledged in the corporate records; if you use the company card for a large personal purchase, best practice would be to generate a written contract whereby you will repay the loan to the company; and if the company is using real estate that you own personally, you likely need a lease agreement between you and the company. 

Then, once you have the appropriate documents drawn up, follow them. 

Whatever type of company you create, you must maintain the company in good standing and comply with the applicable statutory requirements.  Otherwise, you again face the risk that a creditor could successfully argue that there never was such a legal entity. So, for example, if you have a corporation, you must generate minutes for the annual meetings of its shareholders and board of directors; and you must maintain the corporate record book.  Most legal entities also require annual filings with the Illinois Secretary of State.

Even if not technically required, you should also consider having By-Laws or an Operating Agreement to govern the company.

Then, once you have sorted out the legal entity issues, you should be to meet with an insurance adjuster.  Whether you know it or not, you want and need insurance. You should consider both the value of the assets that you are hoping to protect from creditors and the nature of your business when determining the level of insurance limits to obtain.  For example, if your business assets are worth more than $1 million, then having $500,000 in liability coverage may still leave you exposed if someone sustains horrible injuries due to some negligence on the part of your company.  Similarly, if you are working in a particularly hazardous industry and/or are regularly handling objects of high dollar value, you may need to maintain high levels of insurance coverage.  This can likely be accomplished through combining underlying policies with an overall umbrella coverage policy.

Although The Tapella & Eberspacher Law Firm cannot help select your insurance policies, we can help you with various other asset protection mechanisms, including selecting, creating, and maintaining the appropriate legal entity for your business endeavors.  Please call us today to schedule a free consultation at 855-522-5291.

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