Building a Firewall Between Your Business and Personal Wealth
- posted: Feb. 28, 2021
- Estate Planning
Protecting personal assets is essential for business owners. Without asset protection measures in place, creditors can come after your personal wealth if your business is sued, goes under or can't afford to pay debts or other financial obligations, including court judgments arising from litigation.
The most effective asset protection method is to form a legally distinct entity for your business that limits your personal liability. That means registering your business with the Arizona Corporation Commission as either a corporation or a limited liability company (LLC). Because both of these are legal entities separate from their owners, the owner's personal assets cannot be pursued to repay company debts.
The choice of a corporation or LLC carries certain consequences. A corporation shields its shareholders from most liabilities but does not stop a creditor from going after an owner’s shares to satisfy that owner’s personal debts. That means the corporation’s assets may effectively be at risk. By contrast, an LLC can protect its business assets from an LLC member’s personal financial obligations. However, corporations have other advantages, such as the ability to freely sell shares to raise capital, so the choice of entity depends on your particular business needs and objectives.
Whether you go with a corporation or an LLC, you'll need to do more than file the proper paperwork to protect your assets. You'll need to operate your business like it's a separate legal entity. If there is insufficient separation between yourself and your business, Arizona law allows business creditors and other claimants to ignore the legal distinction between you and your company. This is called "piercing the corporate veil" and it means your personal assets may be fair game.
To maintain the distinction between you and your business, you should keep separate bank accounts and otherwise manage your finances separately. Don't use your own funds to make business purchases and don't dip into your company bank account to make personal purchases. You should also make sure you use your company name for all business contracts and loan undertakings. Do not pledge your personal assets, such as your home, as security for business loans.
A critical part of asset protection is to make sure your business is adequately insured against potential liabilities. Different policies should be put in place to cover all possible types of claims, from breach of contract to property damage to personal injury. Having sufficient insurance coverage can guard against a creditor or other claimant attempting to seek reimbursement by suing you personally.
If you own or co-own a business and need help building a firewall between your business and your personal wealth, the Law Firm of Joseph M. Udall, PLC can advise you on devising effective strategies. To schedule a free consultation, please call 480-500-1866 or contact us online.