Asset Protection 101: Small Business Liabilities

Many startups begin as sole proprietorships. They do business in their own name or as a certain person. They prefer this method because it has fewer formalities. However, let not the minimum formalities fool you – this is the most dangerous form of business ownership you can run.

There is no legal distinction between you and the sole proprietorship, which means that if you end up being sued, you risk your business and personal assets being attached by creditors.

A sole proprietorship might be dangerous, but the danger is magnified when you do business with a partner. A partnership doesn’t require you to come up with a partnership agreement or the need for official documents, all you need is to work together in the business.So, how does a partnership take you down? Well, if you are working with a partner, be sure that you trust them. If they do something stupid, you are also liable to the mistake that has been made and have to pay for damages.

For instance, if your partner incurs a debt, acts negligently or causes an accident, you are also included in the mix. Regardless of what percentage the partner owns in the business, the judgment is that the creditor has to collect 100 per cent of the damages from any of you. This can be a disaster if you are the silent partner who contributed all the money for the venture.

So, if you want to work with a partner, you need to have a legally binding agreement. If it is a single deal, go for a joint venture, which allows you to do a single deal, and then close it up. For long-term deals, use a limited liability, corporation or limited partnership.

If you are a professional, opt for a limited liability partnership (LLP) that will shield you from the wrongdoing of your partner. However, this doesn’t protect you from your own mistakes.

When you decide to form a corporation, try and make sure you sign the checks and other obligations in the corporate capacity. This means that you don’t sign personally the way you do on personal documents.If you are the CEO of a company, then sign all of the letters and other official documents in the right capacity. For instance, Daniel Peter, CEO. As an asset protection lawyer, I have seen lawsuits that emanated primarily from using the wrong designation. Instead of an officer using the corporate capacity, they sign using their personal capacity. Big mistake.

Another point to take into consideration is to ensure your business cards, letterhead and signs state the designation. If you are a corporation, then add the designation as such. Make sure you include Corp., Inc., or Ltd. at the end of the business name.

If you are establishing a new business, then you might be asked to use your personal signature to guarantee the debts of the corporation. When you do this, you are merely telling the creditors to take your assets when the company has an issue.

If you have signed on business liabilities as a personal guarantor, then you need to notify the corporate owners that you want to remove your personal guarantee.

If you allow your spouse to co-sign on a business liability, then you will be making a big mistake. When a business fails, you put your spouse at risk as well.

Federal copyright laws are stringent. If you use any design, be it a logo, name or photo that is identified with another company, you can be sued for copyright infringement. Check if your insurance protects you from copyright lawsuits.

Businesses come with many liabilities that can take you down. What you need to do is to work with your asset protection lawyer to make sure you protect your business assets from creditors and losses.