I recently presented to the International Furnishings and Design Association. They were a wonderful crowd, very engaged and asked great business questions. While we covered a lot of information, I thought I’d share some of the helpful, easy tips that all business owners can immediately implement to protect their personal assets from company obligations.
First, always use your company designation with your business name – LLC, Inc., Co., etc. If you do not use the company designation, the businesses and consumers with whom you engage in business do not know that you are an entity. If they don’t know you are operating as an entity, an argument can be made that you were using a trade name and therefore liable as a sole proprietor or partnership which means your personal assets are exposed for company obligations. Make sure your company’s legal name and designation (for example – “Asset Protection Enterprises, LLC”) is on all of your company documents – your business cards, letterhead, invoices, website, marketing collateral, contracts, permits, licenses, EVERYTHING.
Second, if you are signing a document on behalf of the company (such as a contract or a lease) always sign using the company’s legal name and then you sign using your company title. If you are a member managed limited liability company, sign using your title “Member.” If you are a manager managed limited liability company, sign as “Manager” or “Managing Member.” Perhaps you have a corporate position. If so, sign as President, Vice President, etc. The important point to remember is you should sign as the officer of the company so there is clear documentation that the company is entering into the agreement and you are a representative of the company. If you fail to use the company name or your title, an argument can be made you are entering into the agreement personally and thus, personal liability will attach to it.
Third, do not sign a personal guaranty. If you sign a personal guaranty for a company obligation, then you are personally liable for that obligation. In this economic challenging time, you will be asked more frequently for a personal guaranty. If the party requesting the guarantee has more bargaining power than you do and requires the guaranty, then your next line of defense is to negotiate the personal guaranty. For instance, if the personal guaranty is to cover a 5 year commercial lease for your business, negotiate a personal guaranty for a term of 2 years and cap the maximum amount of financial exposure, such as an amount equal to four month’s rental payment. If you don’t cap it, your exposure is unlimited.
Fourth, obtain appropriate insurance for your business. An entity does not have unlimited protection. For instance, it never protects the owners from their personal negligence. I recommend you establish a relationship with your insurance broker so they have a clear understanding of your business, your industry, and its risks so you can carry appropriate coverages to adequately protect your business and your personal assets.
If you implement these 4 simple steps, you have taken significant action to protect your personal assets and you can enjoy a peace of mind that comes with that protection.