5 ways to safeguard your personal property

Insulate personal investments from business risks by diversifying them

While all businessmen must believe in their own story, to be successful, it is important to also take some chips off the table.

Today, many businessmen have a substantial amount of their personal net worth tied to their businesses. And in the event of an economic downturn, they are pushed towards personal bankruptcy, including loss of house and property. The following five steps can safeguard your personal assets from creditors and potential lawsuits.

Relook legal identity

Any business is an entity on its own. While the type of the business entity may be dictated by scale, scope and circumstances, it is clear that a few types create higher degree of liability on personal wealth than others. If a business is registered as a sole proprietorship, the legal liability is unlimited.

In case of lawsuits, even personal assets — house, personal property, investments — can be seized to pay creditors.

In contrast, if the business is registered as a corporation or a limited liability partnership, only business assets are exposed to such obligations. So the first thing a businessman should do is weigh in this aspect of the business entity type.

Separation

Once you have changed the business to a corporation or a limited liability, it is advisable to separate business and personal matters. First, consider registering properties and assets in the name of your business, and personal belongings in your or a family member’s name, rather than the business owning all the assets. Other important actions include having separate bank accounts for the company and personal use; maintaining records that will help with your filings and requirements for regulatory compliance; and ensuring that the company’s name is mentioned in supplier agreements, property leases and employment contracts.

A business owner needs to consider different types of insurances.

Buy adequate insurance

‘General liability’ insurance — to indemnify from any financial risks originating out of injury to any third-party or due to negligence — could be the policy of choice to begin with. Consider the case of a restaurant owner. If a customer sues the owner for negligence, this insurance will come in handy. Additionally, one needs to buy life and health insurance covers. Customised advice from a wealth advisor can spare a lot of pain and provide precise solutions.

Have a succession plan

It is possible that the owner might have kept sucession plans for posterity with the hope that his/her heirs might be interested in running it. What if that’s not the case?

One way to remove such kind of uncertainty is by devising family governance structures such as family boards, shareholder agreements and family constitutions that provide a robust framework for managing family-business objectives and avoiding conflicts. Moreover, if you have partners in your business, consider a buy-sell agreement with them, whereby the partners agree to purchasing an exiting partner’s share in the business at a price previously agreed upon. The price can be regularly reset in sync with the value of the business.

Diversify investments

The best and the long-term way to insulate one from business risks is to take out income or dividends from business and invest them in a disciplined manner. A financial advisor can help diversify the personal investments into stocks, bonds, real estate, gold and commodities.

The exit plan should be supplemented by a robust asset-allocation strategy.

Private trusts can be used to fund these investments. If structured well, they can not only be used as tax-neutral (meaning no change in tax impact) vehicles, but also for earmarking investments for dependent family members and insulating these earmarked vehicles from business risk.

The writer is Head of Wealth Planning, Sanctum Wealth Advisors

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