Asset Protection: Good Insurance Is Just the Beginning
For many contractors, any discussion about asset protection revolves primarily around various types of insurance. While insurance is a critical component of your asset protection program, it’s only part of a larger, more comprehensive effort.
If you haven’t reviewed your company’s asset protection strategy lately, here are steps you can take to get started.
Identify Assets and Risks
The first step is to inventory all assets – both business and personal – and identify the risks associated with each. Such a list could be overwhelming so it helps to begin by organizing and prioritizing things. Obviously, you’ll give the highest priority to protecting your most valuable assets.
It’s also a good practice to prioritize the risks to which your various assets are exposed. Rank risks according to both the likelihood that they will occur and the potential damage they could cause. Plot them on a simple X-Y matrix if that helps, giving the highest priority to risks that rank high on both scales.
Structure Your Business Properly
Your highest priorities are likely to include protecting your personal assets – like your home, savings and personal property – from business creditors or litigants. A common strategy for doing this is to form a corporation or limited liability company (LLC) to shield your personal assets.
The choice of business structure involves other factors in addition to asset protection, though. So work closely with your legal and accounting professionals when considering how to structure or restructure your business.
In some cases, you might be advised to form multiple business entities for various aspects of your operations. The goal is to see that risks from one business activity do not imperil your other businesses.
Multiple layers of holding companies and operating companies can make it more difficult for litigants to attach assets. Establishing a separate LLC to lease real estate or equipment to the operating company is another proven strategy.
Once you have erected barriers to shield your assets, it’s important to maintain and respect those boundaries. Avoid making personal guarantees for lines of credit or other obligations if possible. Take care not to mix personal and corporate funds, and be careful about using your business to provide yourself with unusual personal perks or extravagant purchases.
You should also be scrupulous about maintaining complete and accurate corporate records and documentation.
Reduce Risks and Minimize Exposure
Effective quality and safety programs are important on their own merits – they’re just good business. But they also can be valuable tools for protecting your assets against losses due to injuries, accidents or other types of damages.
Your asset protection effort should also include proactive financial management strategies that reduce your company’s risk exposure by minimizing unencumbered assets. For example, leasing equipment and vehicles rather than purchasing them outright can reduce the assets at risk in your company. A company that owns significant assets free and clear can be a more tempting target for potential litigants.
Review and Update Insurance
To fully protect both your business and personal assets, you should also maintain adequate and appropriate insurance coverage. Develop a relationship with an experienced and trusted agent who can advise you on the most cost-effective strategies that match your particular risk profile.
In addition to maintaining required workers compensation coverage, you should also regularly review your general liability and property and casualty policies, as well as any umbrella coverage you carry over and above these policies. In some cases, more specialized policies offering business interruption or cybersecurity coverage also might be warranted.
Remember that your assets and risk profile are always changing. So schedule regular policy reviews with your insurance agent to be sure your coverage is still adequate and appropriate to current circumstances.