When Paul Mwenesi woke up one morning to find out that he was losing the acre of land in Thika, his heart broke into a million pieces.
His business was gone too, and his prized Subaru had been the first asset the creditors had spirited away. Over time, he had accumulated loans that he used to support his matatu business.
While he had tried doing all he could to prevent the auction of his assets, the accumulated interest had sunk him deeper in debt. Just like Paul, many entrepreneurs learn the hard way the importance of asset protection when creditors come calling.
A comprehensive asset protection plan helps prevent or significantly reduce risk by insulating a business and personal assets from the claims of creditors.
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“I wish I had known to separate my personal assets from the business assets,” Paul says. Such a plan employs legal strategies that are put in place before a lawsuit or claim arises.
Here are some tactics to secure one’s assets:
1. Operate your business under a corporate veil
“It is always best to operate under a limited liability company,” says Dr Peter Mburu, a property lawyer. This means that what the business owes, all the debts, are not recoverable from what the business owners have as personal assets. This ensures safety of their assets.
The business owner should also keep separate the business bank accounts and personal bank accounts.
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“Business assets should be registered in the name of the business and business owners should keep their personal assets separate so that in the case of bankruptcy, the individual assets or bank accounts are considered separate from the business,” says Mburu.
2. Have a business lawyer on speed dial
Hiring, or even having a business lawyer on retainer, can help protect business assets. This should be a consideration for every entrepreneur even before opening a business venture, with the lawyer helping one iron out any legal difficulties or questions that may come to haunt the business.
The lawyer can help a business person answer questions such as whether to set business up as a sole proprietorship, a partnership, or whatever other classification. In addition, they can help the business person understand the advantages and disadvantages of each of the classifications when it comes to asset protection, and how to navigate the opening and running of such a venture amid possible legal headwinds.
The lawyer also ensures use of proper, correct and legal contracts and business procedures so as to maintain highest levels of integrity.
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“Many people who start sole proprietorship, for example, find themselves more vulnerable to legal conflicts and loss of assets than those in partnerships,” says Mburu.
3. When your spouse has many loans
Mary and John, are married. Mary is a business woman who reaches out to creditors a lot, while John is a doctor. In order to prevent their home, and personal vehicles from being sold should Mary default on her loans, they can register some property under John’s name.
This works because creditors of one spouse cannot legally reach the assets of the other.
“Asset protection in the context of marriage requires a strategy where valuable assets are held as the separate property of the spouse with the least exposure to risk,” says Mburu.
In the case where both spouses agree to be co-debtors on a loan, such as when spouses both sign the family home mortgage, then both spouses would be jointly liable. This is, however, a risky venture.
“Some assets can also be registered in the names of different entities, for instance, in the names of people or companies who are not necessarily involved in the running of the business. This is to ensure you as an individual have a soft landing should things go wrong. However, this must not be done with the intention to defraud creditors or to run away from creditors,” says Mburu.
A trust is basically an agreement between a trustor or grantor (who is the person looking to keep his property secure) and the person responsible for managing the assets of the trust (the trustee). These assets are protected from any lawsuits as one cannot be sued for assets they no longer control.
The trust provides that the grantor will transfer certain assets to the trustee, who will hold and manage the assets in trust for the benefit of the beneficiary. A trust that is created during the life of the grantor is called a living trust, while a trust created after the death of the grantor through a will or living trust is referred to as a testamentary trust.
There are two basic types of trusts: a revocable and irrevocable trust.
A revocable trust is one in which the grantor reserves the right to alter the trust by amendment, or to dissolve a part or all of the trust by revoking it. The grantor has no such rights with an irrevocable trust.
5. Establish a holding company
Another protection strategy for business is to keep multiple entities separate. This basically entails a business putting assets in different limited liability companies or corporations. The biggest benefit to business owners is that in the case of a financial loss in one part of your business, there is limited impact on all of your assets. One can have an operating company and, on the side, a holding company. The operating company will then have access to, and typically be in possession of the assets, but will not have ownership of them. The holding company owns the assets.
Operating a business is not without risks and this separation of entities helps protect your business assets and gives your business the opportunity to continue operations even when a financial mishap occurs. This is because using holding and operating companies also helps to limit liability risks in your business structure.
With this structure, the small business owner can eliminate, or limit, liability for both business debts and personal debts.
6. Protect your intellectual property
Coca-Cola Corp owns the trademark name Coca- Cola, and its special formulae that gives it that distinctive taste. Anyone else who uses that name or copies the formulae and comes up with a different drink with exact taste could be sued by Coca Cola, and rightly so. The formulae and the name is the corporation’s intellectual property. It is how they make their money. And so they have protected their intellectual property.
Have you come up with one of a kind creation? This could be an app, invention, a literary or artistic work. This is your intellectual property (IP), and it could be your most valuable business asset.
Intellectual property is property that includes intangible creations of the human intellect. This includes designs and symbols, names and images used in a business. These are the very symbols of a business that distinguish it from other businesses.
Protecting one’s creativity is crucial in maintaining one’s identity and authenticity.
This, however, requires that you sign an assignment agreement.
While it is best practice for your business to own its IP, the IP is at risk if a client makes an adverse claim against you. This could be someone laying claim to it. In order to insulate your IP from your company’s day-to-day commercial activities, one could also assign the IP to the holding company if one opts to have a dual company structure, that is, an operating and holding company. The holding company will own the IP and license it to the operating company.
7. Purchase and maintain appropriate insurance cover for Business and private assets, and maintain tax records
You may do all the right things but if you cook your accounts, don’t keep proper audited books of accounts and tax returns, it may all be for nothing. Be above board in your dealings. Do not try to cheat the government of taxes, because Caesar always gets back what is owed to Caesar. And your business may not survive it.
Get proper insurance for your assets. This could be against fire, theft, accidents, or damage. It will pay off should such tragedies occur.