This is the eighth step in our complete series of Getting Started Investing. If you’re a beginner who’s looking to make your first investment and build wealth for the future, then read on.
Unfortunately, we live in a very litigious society. To protect your personal assets when you own a business, you need to separate your business items from your personal ones. Why? Well if your business gets sued or goes bankrupt and you’re a sole proprietor, your personal assets are fair game.
How to Protect Your AssetsYou need to protect yourself from from the three L’s: Looters, Lovers, and Legal changes in our tax code made by politicians.
Before we dive into how to protect your assets, here are the two main reasons WHY you need to protect them:
1. From being sued
2. In the event of your death
Whether you own a business or have a good amount of investments (or both) it’s important that you have a plan of action in the case of your death or in the event you get sued. You and your family could be vulnerable if you don’t have the proper protection.
Set up a separate business entity. Suck it up and fill out the paperwork to turn your small business into an S-corp or LLC. Your personal liability will be limited should something happen to your business.
Keep your taxes straight! Diligently keep your personal and business transactions separate. This will make your life significantly easier come tax time and will make the process much smoother should you be chosen for an audit.
To read more about separating business from pleasure, check out Why You Should Keep Business and Personal Separate.
Legal disputes happen. In fact, you might be surprised to hear just how often they happen. Lawsuits result in the transfer of over $30 billion per year. Yowza! Before you become a statistic, let’s discuss how to protect your assets when a legal dispute comes up:
Incorporate your business. Like I said before, you NEED to separate your business from your personal transactions. If your business is sued, your personal assets will be protected.
Have plenty of insurance. Insurance is probably the most boring, yet most important thing you will ever pay for, especially when you own a business. At the very least, you need general liability insurance for your small business.
Create trusts. Trusts are one of the best ways to protect your assets in the case of your death, being sued, and international issues. If any of these events takes place, the assets will be transferred as indicated in the trust and will be protected from creditors.
Protect money in retirement accounts. Generally, retirement accounts are exempt from claims from creditors and bankruptcy proceedings. By maximizing your retirement accounts, you can protect your money and increase your retirement cushion.
Get a lawyer on consult with on a semi-regular basis. When you decide to launch a new product or service, it is a good idea to consult with a competent lawyer to discuss potential legal actions that may result from the launch.
For more information on protecting yourself from legal disputes, read How To Protect Your Assets From Legal Disputes.
Types of Liability Insurance
Insurance is incredibly important as an entrepreneur. Liability insurance is an option but it is limited after a certain point. You might want to consider umbrella insurance for your business.
Umbrella insurance picks up where other liability insurance ends. If your liability insurance covers $500,000 and you were sued for $1 million, your umbrella insurance will cover the other $500,000.
Do you need it? If you are worried about protecting your assets, it’s not a bad idea. If you own a lot of assets, it’s definitely a good idea.
The costs are relatively low and can literally save your company hundreds of thousands of dollars in the event that you are sued.
Monitor Your FICO Score
Are you planning on renting or buying a home? How about having hot water and electricity? I’m going to assume yes! In order to keep your rates low and your terms favorable in all aspects of your financial life, you need to monitor your FICO score.
Borrow sparingly and ALWAYS pay on time. Do not apply for numerous lines of credit and never miss a payment. Both of these aspects will affect your credit score in a positive way.
Watch your credit utilization. The amount of debt you have compared to the amount of credit you have available should be low. Credit utilization of 80% or more will negatively impact your credit score.
Not all loans are equal. Different types of loans (mortgages, student loans, credit cards) and the payments made on them will impact your credit differently. Follow the basic hierarchy when you make payments to positively impact your credit score.
Monitor your credit for errors. Mistakes happen. And when it comes to credit reports, they happen A LOT. Monitor your credit report on an annual basis to make sure there are no errors.
Your credit report is available free from each of the three credit reporting agencies each year. However, for your FICO score, you will either need to pay for it or apply for a loan. Additionally, a few credit cards offer a complimentary updated FICO score each month.
To learn more about your FICO score and credit report, read How to Build a Strong Credit Profile.