I know most asset protection articles out there focus on protecting personal property from business liabilities, but how do you protect your business’ assets?
“Insurance” is the most common answer I get to that question, and I definitely agree. It is an absolute necessity to be adequately insured. BUT, that’s not the end all be all to protect your assets. What if you get sued for an amount that’s more than your insurance covers? What if one of your employees is negligent and insurance won’t cover it at all? Is that a risk you’re willing to take?
Have you ever wondered why when you get on a flight the flight attendant comes over the intercom and says “Thank you for flying ABC Airlines Inc., this flight is operated by XYZ Air LLC”? The answer is ASSET PROTECTION!!! There’s a lot that goes into it, and I would advise seeking legal counsel to sort out your own situation, but let’s just keep it simple. God forbid, if the plane goes down due to engine failure, the airline is probably going to be hit with lawsuits totaling hundreds of millions of dollars. That’s way more than their insurance will cover, so where will the money come from? The company can pay out of cash reserves, or may even be forced to sell off assets to pay the claimants if they don’t have their assets protected.
In the scenario above, ABC owns XYZ, but they are two separate and distinct legal entities. XYZ is the owner and operator of the plane, not ABC. The plane is the only asset of XYZ (do you see where I’m going here?). If a company is to be sued for the disaster, it would have to be XYZ, and their only asset has been destroyed! That means that the only claims paid out would be from the insurance, and all of ABC’s assets couldn’t be touched. Of course, XYZ would have to file bankruptcy and close their doors, but ABC can carry on with normal business.
Sounds a little crazy, but makes a lot of sense, right? Of course there are a lot of different ways to protect assets and this is just one of them. However, this is a very common way large corporations protect their assets, and it’s not so costly that you can’t do the same thing with your business. The question you have to ask yourself is, “Is it worth the risk to not be protected?”