Learn How To Separate Your Personal Assets from Your Businesses Liabilities
It is a tragically common scenario: you have spent the last several years building your business from the ground up. It has spent the last several quarters surpassing projections, and you are optimistic about the future of your growing brand. But then comes the tragedy. It can take many forms, from natural disaster striking down your factory, to divorce and forcing asset split, to lawsuit. A rival cloud company with bigger funds, better lawyers, accounting wizards, and almost unlimited resources is coming after you on a trademark violation. It is tenuous at best, and the definition of a frivolous lawsuit. But you don't have the ability to fight back as hard, and they win a settlement.
Not only do they strip away business assets, but they go after your personal ones. What could have been done to prevent this?
Protecting Your Personal Assets From Liability
There is a number of ways to keep your personal assets separate from your professional ones.
Limited Liability Company (LLC)
Registering as an LLC is your easiest choice. Not only will it put a barrier between your personal assets and your business, but it offers flexible tax options when it comes to report your companies quarterly earnings. If you own real estate, equipment, or products associated with your company, those can also be registered under their own LLC. This provides even greater security, as few suing agencies will wish to pay the legal fees for each separate lawsuit.
How much does it cost to establish and run LLC?
In general there are two types of fees when having a LLC company.
- State fees
- Service fees
- Additional fees (filling fees - not always; expertise and additional services from service provider)
Costs to set up LLC can be generally put into 5 categories:
- Company Name
- Filling Articles of Organisation (typically between $50 and $800)
- Publication ($40 - $2,000)
- Operating Agreement (free - $100)
- EIN (usually free)
As a bonus to LLC set up costs there are ongoing costs that can be generally recognised in 3 categories:
- Annual Franchise Tax (flat annual fee applicable only in some states. For instance, California having $800 while Delaware being at $250.)
- Reporting Fees (this fee varies greatly by state and by other parameters, like a number of partners. For instance, in NY this fee goes from $325 to $10,000/year)
- Compliance (this is not an actual fee, but more like an operating cost that makes it hard to put a price on)
To read more about LLC cost please reffer to this guide by Incorporate.com.
Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, sports club, or a government of a new city or town.
Many people believe that incorporation will protect them from having their personal assets liquidated. In some cases it will, but there are exceptions. For example, a doctor who is sued for malpractice will not be covered under incorporation. It also may not protect you if a partner is sued and the judgement blankets others at your company.
Cost of incorporating vary based on state you are going to be registered in and can be categorized:
- Filling Articles of incorporation (often $100-$250, paid to Secretary of State)
- First Year Franchise Tax Prepayment (normally $800 - $1,000)
- Fees for Different Governmental Fillings (between $50 and $200, this fee is being paid to government and is a separate fee from the first mentioned, which is being paid to Secretary of State)
- Attorney's Fees (usually $500 - $700, but some attorney's fees can jump high to up to $5,000)
To learn more about Incorporation fees check this brief guide by Legal Zoom.
Becoming Bonded & Insured
Insurance and bonding protects the company from losses after unexpected events. And weathered clients always prefer working with companies that are appropriatelly covered. Depending on your company’s industry and history, but in some riskier cases you may also need to get bonded before your potential clients will decide to hire you.
While insurance and bonds are different, both are key to a business’s risk management strategy.
Of course, your business and personal assets may be one and the same. This is the problem of many of the those in skilled trades face. In which case, it may be more beneficial to become bonded and insured, on top of any business registration decisions you choose to make.
Considering a growing number of customers refuse to work with a business that isn't bonded and insured, there are enough pros to make this almost mandatory. Keep in mind that you need to have more than a minimum amount in your bank account in order to file for bonding. How much will depend on the chosen insurance company you go through.
In order to become bonded, you must first determine what type of bond do you need. There are several types of bonds you can choose from:
- Janitorial bonds (compensates for unsatisfactory work or employee theft)
- Fidelity bonds (protects against accusations of theft)
- Construction or contractor bonds (also called License and permit bonds. It ensures that the hired construction company can do the job well done based on state's legislation and building standards)
- Surety bonds (protects against unsatisfactory or incomplete work)
Check more about the right bond for you in this brief guide by Insureon.
How much does bonding cost?
Pricing of bond varies greatly on too many factors to give you exact answer. Generally you pay between 1% and 3% of total bond coverage annually with good credit score, and up to 15% with a bad one. But since there are more elements in place, regarding solely to a credit score will not do.
Protect Yourself To Protect Your Company
Your business assets are always going to face a level of risk given the litigious nature of our society, but you don't have to live with your personal assets being threatened.