Business planning should always consider asset protection, both for the owners and the business itself. Asset protection for the business should take into consideration protecting the operating assets for the business. Asset protection for the owners should consider wealth preservation.

Why Asset Protection for Business Assets?

Your brand is often the strongest asset of the business and sometimes the most difficult to protect. Even if the business is financed, the strength of the business depends on the protections afforded, the hard assets and the intellectual property. The business also needs protection from employees, vendors and customers claims, so strong contractual protections are essential.

Why Asset Protection for the Owners?

Some business claims can result in personal liability, especially where the owner is also the operator of the business. Wage-and-hour claims, other employment related disputes, environmental claims and tax claims can expose the owner’s personal assets, including the owner’s real estate. Clear delineation between business and personal bank accounts and other personal funds and loans are essential to maintain protection.

Basic Legal Strategies in Entity Formation

The basic goal is to insulate business claims and assets from personal assets. Building a business that protects personal wealth requires establishment of a business entity to avoid personal liability of the owners. The typical business entity choices are a limited liability company, a business corporation, or a partnership. Historically, business corporations and partnerships were selected based on tax considerations. This is no longer true because the limited liability company (LLC) form of business basically affords all of the tax benefits enjoyed by business corporations or partnerships, and within certain parameters, allows alternating the tax treatment among tax years. The LLC can select to be taxed as a partnership or a business corporation and then can elect to change its tax treatment. The LLC can elect to pass losses onto the individual members like a partnership or can elect to carry operating losses at the entity level like a business corporation.

Limited liability companies also have additional advantages. Public filing of an LLC does not involve as much disclosure on public records as does a partnership or business corporation. LLC member rights and classes are not obligated to be publicly filed as are business corporations and partnerships. Creditor claims against LLC members are difficult to assert against their assets in an LLC. Depending on the state of establishment, an LLC may not even be liquidated to pay debts of a single owner even where the owner placed the asset in the LLC to shield it from creditors, however, this body of law is evolving.

Basic Strategy in Intellectual Property Protection

In order to protect the brand of the business, the intellectual property of the business must be identified and protected. State and federal statutes provide a modicum of protection against confusion or third party use of unregistered intellectual property, but federal registration provides much greater protections. Trademark registration with the Patent and Trademark office is essential for any business which intends to use the mark as a unique identifier with multiple locations or national reach. Trademark registration protects logos, names and slogans. Copyright registration provides protection for creative content, such as cookbooks, menus and promotional materials. No registration is required to protect trade secrets and know-how because these lose their value if publicly known, however, efforts must be made to keep these assets confidential.

Basic Strategy in Preparing Business Agreements

Contracts define the roles, responsibilities and expectations of the parties. Clear and precise vendor agreements, employment agreements and operating agreements for partnerships or LLCs are essential to enhance smooth relationships. Pay attention to limitations of damages and dispute resolution clauses. Perhaps your agreements should have attorney fees awarded to the prevailing party or should resolve issues without a jury trial or should mandate confidential arbitration. Consider whether restrictive covenants should be contained in these agreements. Note that this area of law is also quickly evolving.

Basic Strategies for Adequate Insurance

The most common claims against businesses are protected by insurance policies. A quick checklist includes general liability insurance, employment practices liability insurance (EPLI), which protects against claims of wrongful termination, discrimination and wage violations, property insurance, and workers compensation insurance. Many businesses choose to have umbrella policies to provide additional coverage beyond policy limits of the other policies, and may even provide personal protection to the owners. Make insurance brokers your friends.

Advanced Strategies

I recommend parent, umbrella companies to own each business asset center. Establishing separate business entities to protect the intellectual property from the operating business where employment claims may arise is the best practice. Separating real estate ownership in a separate entity can similarly avoid claims affecting real estate affecting other business operations. Usually, the umbrella entity owns all of the separate real estate, operations and intellectual property entities.

Personal asset planning should be considered to protect personal assets. Many businesses will seek small business or SBA guaranteed loans. Landlords may demand personal guarantees. As protection, an owner might consider taking a home equity loan in advance of these guarantees in order to have cash available not accessible to the holders of the guarantees. This is sometimes referred to as “equity stripping.”

Owners may choose to transfer assets in advance of such guarantees to remote and trusted third parties. Formal asset protection trusts are sometimes formed so that personal assets, like home or real estate, is transferred to a trust irrevocably so as to be beyond the reach of creditors. Tax issues must be considered when structuring these arrangements but can be structured tax efficiently. For additional protection, the trustee may allow equity stripping so that the grantor of the trust, now irrevocable, obtains the cash from the assets placed in the trust. Only in rare cases do courts allow personal creditors to reach the trust assets. The courts in those infrequent occasions where warranted will issue an order to the trustee directing the trustee to dispose of the assets to allow a creditor claim.

Offshore asset protection trusts provide even more protection as long as the assets transferred where not part of fraudulent conveyances. Many are Cook Island trusts, where the assets are transferred to an irrevocable trust in the Cook Islands away from U.S. jurisdiction. The insulates the trustee from US court orders. The trustee may be an LLC owned jointly by the trustor and the Cook Islands trustee. The LLC trustee may allow equity stripping and full rights to draw the equity out of the trust assets and maintain asset protection, and this is perfectly legal. Again, certain tax issues should be vetted to insure the best tax outcome consistent with asset protection.

A good legal foundation with the basic strategies will serve the small business well to provide protection as it grows. Few business founders have the vision to know what protections they will need as their businesses grow, so it is important to review these strategies periodically with trusted advisers who have the resources to see the big picture. These strategies will serve business owners well whether they are contemplating merger, acquisition, divorce or succession. The good offense of a successful business is always complemented by the defense of a good asset protection plan.

Reprinted with permission from the August 21, 2025 issue of The Legal Intelligencer© 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.