Starting a new business venture is an exhilarating journey, but also involves significant financial risks. Seasoned entrepreneurs understand the importance of safeguarding their personal assets from undue exposure. If you’re an aspiring entrepreneur in the Bay Area embarking on your first startup, the experienced San Jose startup and financing lawyers at Structure Law Group can provide valuable guidance on developing a comprehensive asset protection strategy.
Although every situation is distinct, here are a few essential considerations to keep in mind when safeguarding your personal assets from potential business liabilities:
Create a Limited Liability Business Entity
If you run your new business venture as a sole proprietorship or general partnership, your personal assets are exposed. As far as the law is concerned, there is no separation between you and your business. The simplest way to create separation is to form a business entity with some form of limited liability protection, such as a stock corporation or a limited liability company. Even if you are the sole owner of the limited liability business entity, it remains a legally distinct entity from you for liability purposes.
Do Not Make Personal Guarantees
Even with a limited liability business entity, your personal assets may still be exposed if you signed a “personal guarantee” to obtain financing. A personal guarantee means that you can be held personally responsible for a business debt or liability even if your business is organized as a separate entity. Such personal guarantees are often made in connection with short-term financing, such as a vendor extending credit to a business that has yet to establish itself. But it is generally best to seek out other options and avoid making any personal guarantees.
Never Mix Business and Personal Assets
Just as you should typically avoid making personal guarantees to secure business debts, it is also important to never commingle your business and personal assets. This can be difficult during a startup phase when many entrepreneurs will do things like use a personal credit card to pay business expenses. But the more you mix business and personal property, the more difficult it will be later to protect your personal assets from business creditors.
Keep Different Business Ventures Separate
Along similar lines, if you are running several different startups or businesses, make sure to keep them all separate from one another. This means creating a separate legal entity for each business and keeping distinct records for each entity. If you do not do this, then creditors of one business may be in a position to go after your other business assets as well.
Placing Assets in a Trust
A trust is a legal arrangement where you transfer some of your assets to a third-party, known as a trustee, who then manages and utilizes the property for the benefit of a named beneficiary. Trusts are commonly employed to safeguard assets from creditors. However, it is crucial to establish them carefully to ensure compliance with relevant federal and state laws. In many instances, the trust needs to be irrevocable, meaning you cannot modify or dissolve it after its creation, to offer the highest level of asset protection.
Work with a Qualified Bay Area Business Attorney
Asset protection is critical for any Bay Area entrepreneur and it is important to seek professional guidance on this matter. Our experienced Silicon Valley business attorneys can review your particular situation and advise you on the best asset protection strategy for you and your businesses. Contact SLG today to schedule a consultation.