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As an entrepreneur, you naturally have a higher tolerance for risk. However, even the savviest entrepreneurs fear what an unexpected setback may mean for their family or their business. Unfortunately, obstacles are inevitable on the path to financial freedom. The good news is as business owners, we can prepare accordingly. In this article, we’re sharing several asset protection strategies for entrepreneurs. You may be able to leverage these strategies to reduce risk in your business and protect your loved ones.
Part 1: Asset Protection Strategies For Your Lifestyle
Whether or not you have family members who depend on you financially, you’re likely accustomed to a certain lifestyle. That doesn’t necessarily mean you’re living a life of luxury. However, you likely have budgeted expenses that persist whether you have money coming in or not.
When your income is unpredictable, unexpected setbacks can be financially debilitating. For example, an unexpected illness or injury can potentially result in crippling medical expenses or lost income if you’re unprepared. To protect yourself, your family, and your lifestyle, consider the following asset protection strategies.
Lifestyle Protection Strategy #1: Health Insurance
Rising healthcare costs in the United States have forced many small business owners to drop their healthcare coverage altogether. According to data from the U.S. Senate Committee on Small Business & Entrepreneurship, small business owners, their employees, and their families make up more than half of America’s 45 million uninsured. Unfortunately, this leaves many business owners and their families open to significant personal and financial risks.
Having proper healthcare coverage for yourself and your family is one of the most important asset protection strategies for entrepreneurs. While healthcare premiums can be a significant expense, there are strategies you can use to help offset these costs. For example, a health savings account (HSA) allows you to contribute, invest, and withdraw funds for approved medical expenses—all tax-free. Although you generally can’t use HSA funds to pay premiums, the potential tax savings and capital appreciation can help defray the cost. Notably, only those with a qualifying high-deductible health plan can open an HSA.
Lifestyle Protection Strategy #2: Disability Insurance
The risk of disability is more common than you may think. According to data from the Social Security Administration, more than one in four of today’s 20-year-olds can expect to be out of work for at least a year because of a disabling condition before they reach age 67.
If your income and business depend on your ability to work, unexpected illness or injury can be financially devastating. On a personal level, lack of income for an extended period can drain your savings, put you into debt, and set you back years of progress towards your financial goals. And if your business is largely self-funded or dependent on your input to succeed, you may lose it as well.
Disability insurance can be an effective way to bridge the gap and keep your business afloat if you’re temporarily unable to work. The cost is dependent on several factors. However, in general, you’ll pay about 1-3% percent of your annual income for long-term disability insurance. Regardless of your personal circumstances, it’s worth considering disability insurance to protect your assets and lifestyle.
Lifestyle Protection Strategy #3: Life Insurance
Entrepreneurs may need life insurance for a variety of reasons. However, providing for your family in case of your untimely death is one of the primarily drivers. A life insurance policy helps ensure your family can meet day-to-day expenses without depleting savings or selling off assets.
Accordingly, life insurance can also protect your employees (if you have them) and the long-term sustainability of your business. The proceeds can help fund your business until an appropriate succession plan can be implemented. Ideally, your family won’t be forced to sell the business prematurely or at a discount just to make ends meet.
In addition, if you have a business loan, life insurance may be critical for your family to continue making payments. And if family assets back the loan, it can help prevent the bank from seizing those assets as collateral.
Part 2: Asset Protection Strategies For Your Business
As your business grows more successful, you may become a target for creditors and predators. Plus, you may eventually want to sell your stake. In either event, you’ll want to make sure the value of your business is protected.
There are certain asset protection strategies you can leverage to protect your business while you’re at the helm. These strategies can also help ensure that avoidable financial setbacks don’t negatively affect your retirement plan or children’s inheritance.
Business Protection Strategy #1: Personal Liability Protection
One of the first decisions you make as an entrepreneur is how to structure your business. This decision affects a variety of business activities, from how you’re taxed to how you pay yourself as an owner. In addition, your choice of business structure can impact your net payout when you sell your business.
While these considerations are important, you’ll also want to make sure you choose a business structure that protects you, personally. If someone makes a claim on your business, the assets at risk may extend to your personal assets. Incorporating as a limited liability company (LLC), S-Corp, or C-Corp can limit your personal liability.
This personal liability protection is what distinguishes corporations from other entity types, like partnerships or trusts. It’s also why incorporating your business may be one of the most practical asset protection strategies for entrepreneurs. A blow to your business and personal assets can make it extremely difficult to recover financially. Still, you’ll want to consult with a business or financial advisor to make sure it’s the best decision for you.
Business Protection Strategy #2: Liability & Umbrella Insurance
An outside claim against your business can have lasting negative effects on your professional success and personal finances. Depending on the nature of your business, liability insurance can help protect you from unexpected lawsuits and other frivolous claims.
If you provide a service that requires specialized knowledge, you may want to consider professional liability insurance. Sometimes referred to as errors and omissions insurance, this insurance covers you if a client claims you were negligent on the job. Professional liability insurance typically covers things like negligence or alleged negligence, claims involving libel or slander, copyright infringement, and legal defense costs. However, it does not usually cover intentional negligence, property damage, bodily injury, false advertising, or patents and trade secrets. Therefore, general liability insurance may be a better solution.
In certain cases, you may want commercial umbrella insurance. This adds a layer of protection beyond what is typically provided by general liability insurance. Umbrella insurance can be useful in extreme cases, when an unexpected claim could potentially shut your business down for good.
Business Protection Strategy #3: Succession Planning
Your business is likely one of your most valuable assets. As such, succession planning is an important asset protection strategy for many entrepreneurs, especially if your family stands to inherit your share of the business.
The first thing all entrepreneurs can do is position your business for maximum value. This may involve cleaning up your financials, making sure your accounts are in good standing, and ensuring your financial statements are in compliance with accounting standards. In addition, you should periodically ensure all contractual arrangements are current, whether with employees, clients, or vendors. Even if you have no plans to sell or leave your business, taking these steps now can set you up for success when the time comes–and protect you in the meantime.
You may also want to assemble a team of advisors to develop a formal succession plan that supports your goals. Though this plan may evolve over time, having a documented succession plan is a good idea, just in case you need it.
Bottom Line: Protect Your Assets Before You Need To
These strategies may feel like a gamble. You may never need them, but if and when you do, you’ll be glad you planned ahead. In addition to the asset protection strategies for entrepreneurs described above, there may be other measures you can take to protect your lifestyle and business. You should always consult with the appropriate experts before making any changes to your personal financial plan or business strategy.
Oak Capital Advisors specializes in the financial planning needs of entrepreneurs and business owners. If we can help you determine which asset protection strategies make sense for you and your business, we invite you to request a free retirement assessment to get started.