The Basics of Asset Protection

People who have been sued, or threatened with a lawsuit, know the importance of asset protection -- keeping personal funds and other assets safe from sudden seizure through a court order. It happens so often today in America that it rarely makes the news. But it is a growing and cancerous part of the judicial system, and is being used more and more in cases that have little to do with criminal felonies or white collar crime. As it stands right now, if someone loses a lawsuit a judgement creditor can strip them of just about everything -- if they don’t have a good asset protection strategy in place.

Always Separate Business and Personal Assets

This is something both an accountant and a lawyer should tell their clients from day one. Whether it’s a mom and pop operation or a corporation on the rise, mixing personal assets with business assets on the balance sheets is just asking for trouble. Because a judgement creditor is under no obligation to discern between the two. He or she simply vacuums up the entire asset inventory, including all bank accounts associated with the business in question.

To insulate personal assets from company assets, most legal and financial experts strongly advise incorporation and/or forming a limited liability corporation. This effectively removes a business owner one step from direct responsibility for the corporation’s actions and the consequences of its actions. This, in turn, makes it harder for courts to go after the totality of assets, often saving individuals tens of thousands of dollars in costs associated with regaining individual personal property and bank accounts that have been swept up in a general restitution writ.

Avoid Sole Proprietorship

Legal experts are unanimous in denouncing sole proprietorship businesses because of their susceptibility to lawsuits and seizure. They say it’s like a vanity license plate: it may make someone feel good to have their name up front, but in the long run it offers no additional protection when there’s an accident.

Maintain the Corporate Veil

This is the term used by corporate law experts and accountants to indicate the procedures necessary to maintain the legal protections that come from a legitimate corporation. Ignoring these procedures give courts the authority to disregard corporate privileges when settling a lawsuit.

In other words, each corporation has the responsibility to file the appropriate paperwork (according to the state in which it is incorporated) and to keep that documentation up to date. Corporate taxes must be paid on time and documented. In most states a monthly meeting of the corporate board must be held and minutes must be taken and be on file and available for viewing on request.

One other important aspect of maintaining the corporate veil is to resist signing business documents -- let the corporate counsel or the comptroller do the signing. This is a vital component of asset protection.

Invest in a Sound Commercial Insurance Policy

In today’s litigious society, anyone can be sued for just about anything. So businesses have to play smart by, first, incorporating, and, second, by purchasing a good commercial insurance policy. Because no matter how well a business is run and supervised, the possibility of a lawsuit is a growing possibility -- not a lessening chance. With a good insurance policy a company can survive most judgements against it in a court of law. Attorney fees and damages can be handled by the insurance company, which saves a considerable amount of time and money.


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