Bookkeeping mistakes
Business Planning

10 Small Business Bookkeeping Mistakes

Keeping your finances in order is crucial for the success of your business. Even if you're running a small operation, bookkeeping is a critical component that cannot be overlooked. While it may not be the most exciting task, it's important to ensure accuracy to avoid costly mistakes that could hurt your business in the long run. As the person responsible for completing these tasks, it's important to recognize that you may not have the same level of accounting expertise as larger businesses that can afford to hire specialized professionals.

That's why it's crucial for you to educate yourself on the common bookkeeping mistakes that small business owners often make. By learning about these errors and taking proactive steps to avoid them, you can effectively manage your finances and set your business up for success.

Not Keeping Low-Value Receipts

According to Business.org, one common bookkeeping pitfall is not keeping low-value receipts. While the IRS may not necessarily need these receipts, they can be helpful if the business undergoes an audit. This is particularly important for you if you run a small business, as many claimed deductions are likely to be the total of several smaller purchases. As a small business owner, you may either keep physical copies of these receipts in one safe location or scan and upload the receipts to a preferred digital accounting software.

Failing to Track Reimbursable Expenses

Failing to track your business’s reimbursable expenses can result in costly consequences. Your company may miss out on tax deductions and pay more in taxes. To prevent this mistake, consider using expense-tracking software and recording expenses as soon as the business accrues them.

Incorrectly Classifying Employees

If you hire various professionals, such as employees, consultants, contractors, or freelancers. you must correctly identify your employees, but classifying these professional can get confusing. Incorrectly classifying employees and contract workers may lead to severe negative consequences, including lawsuits and tax penalties.

Having Communication Issues

One of the keys to effective bookkeeping is regular communication between the person responsible for the bookkeeping duties and everyone else within the small business. A lack of clear and consistent communication can confuse and lead to errors. If, for instance, someone buys additional supplies or pays out a bonus without informing the bookkeeper, the resulting inaccuracies from the lack of communication can be costly to the business.

Failing To Complete Reconciliations

One way to identify your business’s financial well-being is to reconcile the company’s books with its bank statements. Reconciliation is a complex but crucial process that can help you determine your business’s available cash and identify most financial errors before problems escalate. A common bookkeeping mistake is avoiding reconciliations, completing them incorrectly, or failing to complete them regularly. You can avoid this issue by researching how to reconcile the books correctly and by regularly setting aside time to complete the reconciliations.

Not Storing Physical Financial Documents

Having paper records on hand can be a disadvantage if your business undergoes an audit. Keeping your business’s financial records on computer servers or in the cloud can help improve the company’s daily operations. However, this does not work well for audits, as tax authorities expect a physical paper trail. Due to this, you may want to store physical backups of your financial documents for a minimum of seven years, keeping these records well-organized to make audits as easy as possible.

Not Collecting or Deducting Sales Tax

Determining sales tax can cause issues for the majority of small businesses. One common mistake with sales tax involves forgetting to deduct the tax from your business’s sales, causing larger tax bills later. In addition, you might not be aware of the rules regarding collecting sales tax for online transactions. To avoid these errors and remain compliant, you should stay updated on the latest developments regarding sales tax collection.

Failing To Resolve Issues with Petty Cash

Most small businesses use petty cash for incidental purchases. One person handling all petty cash transactions can help ensure appropriate money management. This can also prevent theft, fraud, and abuse by improving accountability. In addition, you may want to implement clear petty cash policies for your employees to avoid confusion and to ensure that receipts are submitted for all petty cash transactions. These policies can make it easier for you to accurately declare your business’s deductions when completing or preparing your tax returns. Another way to help prevent mistakes is to set periodic limits for petty cash transactions and to review the transactions at the end of each period to ensure that the receipts and outstanding cash match the initial petty cash funds. If errors are found, there will be time to rectify the issue before taxes are due.

Incorrectly Categorizing Expenses

Keeping clear accounts is vital to efficient bookkeeping, and correctly categorizing expenses is an important part of this process. A common bookkeeping mistake for small business owners is placing expenses in the wrong category or using the same categories. You can avoid this common bookkeeping pitfall by limiting the number of categories used in your business accounts by only using standard categories to keep the books simple.

Not Seeking Assistance

As a small business owner, it’s likely that you wear a lot of hats in order to keep costs down. When it comes to bookkeeping, doing it all yourself can be counterproductive. If you lack the financial knowledge and attention to detail required, you might miss costly financial errors in the company’s books. To prevent this common bookkeeping pitfall, consider asking a trusted colleague or friend to check your work or delegate the task to a company employee with the skills required to complete the task effectively. Better yet, outsource your bookkeeping to an experienced professional.

Contact Us, Your Personal Family Lawyer® With Family Business Planning Expertise To Learn More About Bookkeeping and Legal Advice For Your Small Business

As a small business owner, we understand that you have a lot to juggle. That's why we're here to support you as your Personal Family Lawyer® with expertise in family business planning. We want to help you protect your legal and financial rights, so you can focus on running your business with confidence.

If you need additional advice and support in ensuring you have the right LIFT (Legal, Insurance, Financial, and Tax) systems in place, don't hesitate to contact us. We have the expertise and experience to provide you with the legal guidance and answers you need to protect your business and achieve your goals.

This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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Nominee
Business Planning

Protecting Your Privacy: Understanding Nominee Services for Business Owners

As a business owner, you may want to keep your personal information private and out of the public record. Luckily, if you want to run your own business but prefer to stay out of the spotlight, there's a solution to this problem that many business owners use - nominee services. Nominee services allow you to use the personal information of a nominee on your business's records, such as articles of incorporation and annual financial reports, instead of using your own personal information. By doing so, you can keep your identity confidential while still complying with legal requirements.

What Is a Nominee?

According to the Stolen Asset Recovery Initiative (StAR) of The World Bank, a nominee is an individual or corporate entity that rents its name to someone else to protect that person’s identity. Nominees can be any individual, including friends, family members, or professionals like accountants or lawyers. Business owners often look for companies that offer nominee services rather than individuals.

The primary reason company owners use nominees is to ensure the owner’s privacy legally. However, the Internal Revenue Service (IRS) notably requires the actual owner’s information when the business owner applies for an employer information number (EIN). This means that, while the actual business details are not publicly available, the IRS has records of who owns the business.

Types of Nominees

There are two main types of nominees that you may be able to install as a business owner. Both of the following types remain in effect for one year, and as the true owner, you may revoke or renew the nominee service at any time: 

  • Directors 
  • Shareholders

Nominee Directors

Nominee directors act as company directors, and some business owners may appoint them to function as a business’s treasurer, president, or secretary. Company directors must be listed on a business’s records. For this reason, business owners may hire nominee directors to list the nominee’s personal information on the records instead of their own. To appoint these individuals, the true business owner issues a power of attorney (POA) document.

Nominee Shareholders

Nominee shareholders protect the real owner’s identity by holding company shares on the true owner’s behalf. The true business owner can appoint these nominees by issuing a declaration of trust. This document outlines the real owner’s instructions regarding his or her shares, such as how to allocate dividends and transfer shares.

Understanding Nominee Services

Before deciding to utilize nominee services, it’s helpful to understand what you can and cannot do with these services, including the following important topics:

  • Gaining privacy from non-governmental institutions
  • Revealing the owner’s true identity
  • Remaining involved in business activities

Gaining Privacy from Non-Governmental Institutions

You may be able to use nominee services to prevent non-governmental institutions from learning your true identity. This can benefit your business because it shields your asset allocations and investment strategies from your competitors, creditors, and other non-governmental institutions. However, due to laws created to prevent money laundering and tax evasion, you cannot use these services to hide your assets from federal and state authorities.

Revealing the Owner’s True Identity

While you may typically use nominee services to prevent competitors, the media, and other public members from learning their true identities, selecting a nominee does not prevent you, the true business owner, from choosing to reveal your identity at a later date. Sometimes, revealing your identity might be beneficial for the company. If, for example, your business is under intense scrutiny, you may want to publicly reveal your identity to defend the business’s actions more effectively.

Remaining Involved in Business Activities

Nominees are only company shareholders or directors according to public records. You, as the true business owner, control the company and are still actively involved in daily business activities. Additionally, you would still reap the benefits associated with your involvement.

Drawbacks Associated with Using Nominees

There are some risks associated with using nominees, which include the following:

  • Nominee acts contrary to the agreement—Business owners usually have a contract with their chosen nominees to outline what the nominee can and cannot do. However, there is still a risk that the nominee may act contrary to the agreement. While you may be able to seek damages in court if this happens, the nominee might do considerable damage to the business before the issue can be resolved. Such legal disputes can be costly and time-consuming. Moreover, aif you take a nominee to court it will reveal your identity to the public, making the whole process a waste of time.
  • Nominee becomes incapacitated or dies—You might select a trustworthy and competent individual to act as your nominee. However, you may encounter issues if the nominee becomes incapacitated or dies. The nominee’s heirs might fulfill the role, but you may revoke the declaration of trust or POA if the heirs are not as willing or competent as the original nominee.
  • There is a potential for fraud—A trusted nominee might inadvertently commit fraud due to a lack of knowledge of state and federal laws. For instance, the nominee may not stay current with business regulations, which might pose a risk to you and the business. Due to this, you should thoroughly research potential nominee services before signing a contract to ensure that the nominee is credible, knowledgeable, and trustworthy.

Alternative Privacy Measures

There are other things that you can do to maintain your privacy legally. You can use a specific business address to list on the business’s public documents. While this does not protect your identity, it can prevent others from obtaining your personal address. Additionally, you may consider establishing the business in a state that does not require businesses to declare the owner’s information in public records. Alternatively, you can establish multiple LLCs to help maintain your privacy.

Contact us, your Personal Family Lawyer® with family business planning expertise To Learn More About How a Nominee Can Protect Your Privacy

When it comes to protecting your personal privacy as a business owner, it's crucial to have a reliable legal expert by your side. That's where a Personal Family Lawyer® with family business planning expertise can help make the process easier for you. With our knowledge and experience, we can guide you through the legal and financial aspects of protecting your privacy and ensure that your rights are protected. By working with us, you can have peace of mind knowing that your privacy is safeguarded while you focus on growing your business. Contact us today to learn how we can help.

This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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Cash flow statement vs P&L
Business Planning

Understanding The Difference Between A Cash Flow Statement And A Profit And Loss Statement

To run a business successfully, it is necessary to create various financial documents, including cash flow and profit and loss (P&L) statements. Doing this enables business owners to understand their business’s current financial health and make appropriate changes to improve company performance. Many business owners hire accountants to create these documents. Still, it can be beneficial for these individuals to learn how to do this themselves, as this can help them reduce their costs and gain a greater understanding of their businesses. For business owners to create these documents, knowing the differences between them is essential.

What Is a Cash Flow Statement?

According to Harvard Business School, cash flow is the difference between a business’s incoming and outgoing cash during a specific period. Cash flow statements enable business owners to review their business’s finances to determine its cash flow. In these statements, business owners can identify the business’s payments and expenses to determine where its money comes from and how it spends it. One of the key benefits of producing a cash flow statement is that it enables business owners to identify the amount of money required to run their business’s daily operations, enabling them to reinvest any remaining cash into their businesses to improve their long-term performance. It also allows business owners to see if they improved their cash levels or decreased during a specific period. Usually, businesses create these documents quarterly but depending on their preference, businesses may make them more or less frequently than this.

Cash Flow Statement Sections

Here are the three key sections within a cash flow statement:

  • Operating activities: This section outlines the business’s expenses and income, resulting in a positive or negative cash flow. The operating activities help business owners determine the business’s costs and income before considering investments or additional financing.
  • Investing activities: Refer to any investments that might impact the business’s available cash, such as when a company buys or sells equipment or property. Identifying these activities help businesses realize whether it is necessary to reign in their spending or if they can purchase new equipment or make any other investments without significantly impacting the business’s available cash levels.
  • Financing activities: In this section, businesses record information about their bonds or stocks, including their remaining cash after selling or issuing securities or dividends.

Understanding Negative Cash Flow

Business owners can benefit from realizing that negative cash flow does not necessarily suggest that their businesses are unsuccessful. For instance, when business owners decide to make significant investments in the business, which involve new premises or equipment, these expenses may significantly reduce the business’s cash flow. However, these investments may have excellent long-term benefits for the company, such as enhanced maximum output levels, making the negative cash flow worthwhile in the short term. That said, consistent negative cash flow is usually an indicator of a poor-performing business and suggests that changes are necessary for the business to become profitable and survive.

What Is a Profit and Loss Statement?

According to the Corporate Finance Institute, a P&L statement is a financial document outlining how a business performed during a specific period, such as a month, quarter, or year. Also known as income statements, P&L statements differ from cash flow statements, as these documents focus on the business’s profit and losses instead of cash flow. Rather than determining whether they have enough cash to purchase certain things, P&L statements enable business owners to see whether their businesses are generating a profit. A Profit & Loss Statement typically outlines the business’s income, expenses, and earnings alongside other figures that help business owners determine the financial health of their businesses.

When To Use Cash Flow and P&L Statements

Here are some of the main situations when it can be beneficial to use cash flow and P&L statements:

  • Cash flow statements: Using cash flow statements can help businesses identify whether they can afford to pay their invoices, bills, and other expenses for that week or month. Additionally, business owners can calculate if they can afford to pay their staff, fix damaged equipment, or invest in new equipment. From the cash flow statement information, business owners can determine whether they can proceed with certain payments or if delaying them is necessary.
  • P&L statements: Creating P&L statements enables businesses to identify longer-term issues surrounding the business’s financial health, including identifying the business’s quarterly or annual financial performance, its long-term spending and financial projections, and whether the business is likely to gain credit if required.

Importance of Understanding the Difference Between Cash and Profit

When running a business, it is crucial to understand the difference between cash and profit. A company’s cash levels can be more or less than a business’s profits, and a business may have a negative cash flow but still generate good profits. For instance, if a business makes many sales throughout the financial year, it may have generated significant cash. Still, suppose the business has some of its profits recorded as accounts receivable. In that case, it may have insufficient cash available for the period due to it awaiting payment from the business’s debtors.

Alongside this, when businesses sell physical goods, they increase their inventory to improve their maximum capacity for sales. However, if the business struggles to sell these goods, it may need better cash flow, even though it has the potential to make significant long-term profits from selling these goods. In addition, these goods may depreciate, negatively impacting the business’s ability to generate profits from them. Due to these various factors, learning the key differences between these financial statements and how to analyze them for maximum effect may positively impact a business owner’s ability to make sound business decisions.

Contact us, your local Personal Family Lawyer® with family business planning expertise to learn more

As your Personal Family Lawyer® with family business planning expertise, we can help you learn the differences between cash flow and P&L statements. You can make more sound financial and operational decisions when you understand your business’s cash flow. For business owners who find creating and understanding these documents challenging, consider contacting us, your Personal Family Lawyer® with family business planning expertise for advice.

This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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contract
Business Planning

What Needs To Be Included In A Client Contract

Client contracts, or agreements, refer to legal agreements between businesses and consumers. They help establish expectations for the individuals who use a business’s products or services. Additionally, they outline what customers can do if they have an issue with the product or service, including how they can complain. Businesses typically use client contracts to ensure their customers remain satisfied while also protecting the business’s interests. Understanding the essentials to include in a client contract can help business owners achieve this and develop clear, binding agreements.

Client and Company Details

Client contracts typically begin by outlining the parties involved in the agreement. This involves clearly stating the full name of the business, the business address, and any other names associated with the company. Alongside this, it is necessary to mention who the customer is by stating their full name on critical documents, such as passports and driving licenses. It is essential to avoid referring to the customer by any nicknames or other handles.

Project Scope and Terms

If the contract involves services, outline the exact scope and purpose of the service. When doing this, avoid jargon and technical terms. Remember that a client contract can be binding without the need for this language. The critical thing is to include as many details as possible about the service and to be clear about what the company is going to provide and for how much.

Services or Goods Description

Another essential thing to include in a client contract is a detailed description of all the goods and services the company intends to provide to the customer for which they have paid. If the client agreement involves services, it is an excellent idea to itemize these and present them as a list. For instance, freelance graphic designers may offer various services as part of a single package. Doing this is key in clarifying what the customer can expect. Moreover, it helps set limitations for the business concerning what they need to provide. In contrast, if the contract involves goods, simply mention what the business sells.

Payment Terms

It is also vital to mention how the customer plans to purchase the business’s services or goods. These payment terms may involve one-off payments, subscriptions, or installments. It is necessary to mention when the subscription started and the planned end date for businesses selling subscriptions. Additionally, good client contracts involving subscriptions include clauses concerning auto-renewals and advanced notification clauses.

Deadlines and Work Schedule

If the agreement involves services, it is good to outline a work schedule and a clear deadline. This ensures the company knows when to provide the service and prevents customers from withholding payment or filing a lawsuit. To ensure both parties are happy, the company and customer should negotiate the deadline and schedule beforehand. For the company, they must choose a deadline they can meet while also being able to provide a high-quality service.

Expiration Clause

These clauses outline what happens once the agreement concludes. Usually, this clause comes into effect after both parties fulfill their side of the agreement. Essentially, the agreement concludes once the customer receives their services or goods. Some agreements also include a specific expiration date to clarify when the contract is no longer binding.

Copyright Ownership

If the agreement involves the production of original materials, such as graphic design or writing, it is advisable to outline which party owns the copyright for the materials. Usually, the individual or entity providing the service owns these rights until the other party pays in full. After this, the client typically obtains these rights and may use these materials in any way they see fit. If one party has concerns regarding the copyright for these materials, including clauses in the client contract is essential.

Working Relationships

If the client contract involves one party acting as a contractor, it is a good idea to mention that it is that party’s responsibility to pay their taxes. This is crucial as businesses may encounter issues with tax authorities if they categorize contractors as employees. By including this type of language in the client contract, the company hiring the contractor will likely avoid these issues when filing their taxes.

Termination Clause

Termination clauses allow companies and customers to end the agreement whenever they want. That said, there are usually penalties or conditions to fulfill when one party breaches the contract or wants to cancel the agreement. For instance, some client agreements may state that the customer must provide a month’s notice to terminate the agreement to avoid an early cancellation fee.

Dispute Resolution

According to the American Bar Association, dispute resolution refers to several processes used for resolving claims, disputes, or conflicts that do not involve going to court. Many client contracts include dispute resolution agreements that aim to reduce lawsuits by mentioning the available methods for resolving any conflicts between the customer and the company. For instance, many of these agreements outline what the parties may do before resorting to legal action, such as requiring the customer to contact the company beforehand to negotiate. When including these clauses in a client contract, it is necessary to provide contact details for resolving conflicts.

Client and Company Signatures

Client contracts typically conclude with signatures from the customer and company, alongside dates. Including dates is key as it shows both parties agreed on the document’s terms as laid out on the date they signed the agreement. If the signature dates and the contract's effective date vary, it is essential to include both.

Contact a Personal Family Lawyer® With Family Business Planning Expertise To Help With Your Client Contracts

As your Personal Family Lawyer® with family business planning expertise, we can help you by drafting and reviewing your client contracts. Through detailed and specific client contracts, business owners can create clear and thorough agreements that protect their companies. Even though this may not prevent disputes, having effective contracts can significantly reduce the chances of businesses encountering issues. Consider contacting us, an experienced Personal Family Lawyer® with family business planning expertise for additional advice and support regarding the client contracts you need for your business.

This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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Business
Business Planning

What Every Business Owner Needs Now… Live Every Day As If It Could Be Your Last

If you dream of one day retiring from your business, selling it, or leaving your company to your family, there are essential planning steps to take care of today, no matter how far away you think that time may be. Even if you are just starting, beginning with the end in mind will set your business up for a lifetime of success and leave your heirs, clients or customers, and team with a valuable asset when you are gone.

Perhaps surprisingly, properly planning for what would happen to your business upon your death or incapacity is one of the most important things you can do for your company’s growth and success, now and in the future.

By structuring your business affairs with the end in mind, you will naturally make better choices for everything from entity type to hiring and training to pricing and delivery of your services and products.

Using a few basic estate planning strategies to make sure your business survives your incapacity or death can also set your business up for success from the start. Although you should consult with us, as your Personal Family Lawyer® with family business planning focus, to take you through our unique planning process and determine the specific planning vehicles that are right for your particular business and family situation, the following estate planning tools are essential for nearly all business owners.

1. Living Trust

Putting your company in a customized and thoughtfully prepared Revocable Living Trust is one of the best ways to ensure your business’s continued success upon your eventual death or in the event of your incapacity, as long as that Trust is updated over time, and your business assets are correctly titled in the name of your Trust.

A living Trust is an agreement you make with a Trustee to hold title to the shares or membership interests of your business. A Trust agreement is then used to document what will happen to your business when you can no longer run it yourself due to incapacity or death.

Unlike when you use a Will to transfer assets at your death, assets properly held by the Trust agreement do not go through the court process of probate. Instead, those assets are promptly transferred to the person, or persons, of your choice in the event of your death or incapacity. In this way, a Trust allows for the smooth transition of control of your company, without the time, expense, and potential conflict associated with probate or, in the event of your incapacity before death, a guardianship or conservatorship.

Using a Trust agreement, you choose the individual(s) you want to run your company in your absence, whether that absence is permanent (your death) or merely temporary (your incapacity). Plus, Trusts are not open to the public, so your company’s affairs and its assets would remain private, and transfer of ownership can occur in your lawyer’s office, not a courtroom.

2. Buy-Sell Agreement

If you share ownership of your business with one or more other people, you’ll want to establish a buy-sell agreement. A buy-sell agreement ensures that upon certain conditions—such as your death or permanent incapacity—the other owners can purchase your business shares or stipulate that your shares will pass to your heirs.

An adequately prepared buy-sell agreement can prevent your family members from getting stuck owning a business they don’t want and can’t sell. And it also protects your surviving partners from being forced to deal with new owners they never planned on. The key to ensuring a buy-sell agreement works is to make sure it’s funded, usually with life insurance, and that it’s customized to meet the needs of your unique partnership.

One-size fits all buy-sell agreements, sometimes provided by life insurance professionals, are insufficient to adequately protect your family's interest in the event of your death. Instead, your buy-sell agreement should be customized specifically for you, your business partner or partners, and your respective families' needs.

3. Life Insurance

Unless your business generates significant revenue—and will continue to do so upon your death—that income might not be enough to support the ongoing operation after your death and financially provide for your family. By purchasing and properly structuring your life insurance, you can offer your family, team, and clients a financial safety net. In contrast, your loved ones finalize your affairs, and your successor assumes company control.

If your business has multiple owners, you can pair life insurance policies on each partner with your buy-sell agreement. By doing so, your remaining partners can buy out your shares at a previously agreed-upon price, and the life insurance can help pay for the buyout without leaving the business bankrupt.

4. Succession Planning

If you hope to pass control of your company to a loved one or team member, you’ll need to create a comprehensive business succession plan to ensure the company doesn’t fall apart when you die. Beyond merely naming your successor, a proper succession provides stability and security by allowing you to lay out explicit instructions for how the company should be run once you are no longer around.

From specifying how ownership should be transferred and providing rules for the compensation of partners and team members to establishing dispute resolution procedures, an effective succession plan can provide the new owner with a detailed roadmap for your company’s continued success and growth.

Don’t Put Your Business & Family At Risk

Estate planning is every bit—if not more—essential to your company’s (and family’s) continued survival and success as any other issue facing your business. If you’ve yet to put your estate plan in place, consult with us, your Personal Family Lawyer® with family business planning experts today to help you take care of this vital responsibility.

And even if you have an existing plan, you should have us review it to ensure you’ve covered all of your bases and that your plan has been appropriately updated. We have a 50-point assessment to look at your plan, which needs to be updated to consider changes in your life, assets, and the law. These actions will not only help shield your company and family from unforeseen tragedy but also give you the peace of mind needed to take your business to the next level. Schedule your appointment today to get your planning handled.

This article is a service of a Personal Family Lawyer®. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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Asset Protection
Business Planning

4 Fundamental Asset Protection Vehicles For Business Owners In 2023

Regardless of the industry you are in, the reality of being a business owner is that you open yourself up to a number of unique risks that most people don’t have to worry about—and the more successful your business is, the more risks you face.

Unfortunately, most business owners aren’t fully aware of all the potential risks that can affect their company or the options they have available to protect their personal assets from the risks of doing business. This is where asset protection planning comes in.

Asset protection planning is designed to reduce or eliminate the risks of being in business by shielding your business and personal assets from lawsuits, creditors, and other potential threats to the fullest extent legally possible. And it’s absolutely crucial to have your asset protection strategies in place from the moment you open your doors, because once a claim or lawsuit is filed, it’s too late.

In fact, if you take certain actions to protect your assets after a claim or lawsuit has been filed, you could be charged with fraud. With this in mind, the time to take action is now, while there is nothing to worry about and the full range of options to protect your assets are still available to you.

While the specific protections you require will largely depend on the specifics of your business and your personal assets, the following four vehicles form the foundation of most business owners’ asset-protection planning.

1. Business Entities

One of the most fundamental asset protection strategies is setting up the proper entity structure for your business from the start. Without the correct entity in place, your personal assets would be at risk if your business ever gets into debt that it cannot pay, or is hit with a lawsuit.

For example, if your company is structured as a sole proprietorship or general partnership and you go out of business, creditors could come after your personal assets to pay off your business debts. Similarly, if your sole proprietorship or general partnership is hit with a lawsuit, your personal assets could be seized to satisfy a judgment.

By structuring your business as a limited liability company (LLC) or corporation, you can shield your personal assets from liabilities incurred by your business. These structures establish your company as a separate legal entity that’s distinct from you as an individual, which prevents you from being personally liable for the company’s debts or legal liabilities.

As long as you properly maintain your entity’s administrative formalities and keep your business and personal assets separate, both LLCs and corporations effectively create a barrier between you and the activities of your business. Creditors, clients, and other potentially litigious entities can go after your business assets, but not your personal assets.

That said, you can be held personally liable in certain situations, such as if your entity isn’t maintained properly or you mistakenly commingle your personal and business finances. In that case, a court will hold you personally liable for the debts and liabilities of your business. When this happens, it’s known as “piercing the corporate veil.”

This is exactly why it’s so important to work with a lawyer to set up and maintain your business entity, and not try to handle this on your own. The consequences of not maintaining your business entity are just too high, and by the time you are facing those consequences, it’s too late to do anything about it.

We offer you a number of legal and financial systems that make keeping up with your entity’s administrative and compliance formalities a snap. Meet with us, your Personal Family Lawyer® with business planning expertise to find out what entity structure is best suited for your business and how we can ensure you have the maximum liability protection possible.

2. Business Insurance

While setting up a separate legal entity can safeguard your personal assets from your company’s liabilities, an entity will not protect the assets of your business—that’s what business insurance is designed to cover. And since a catastrophic event or lawsuit can wipe out your company, it’s vital to have the proper insurance coverage in place from the start of your business.

The type and amount of coverage your company needs will largely depend on your particular company and its assets. However, most businesses can benefit from the following forms of insurance: general liability insurance, professional liability insurance, property insurance, cyber insurance, and employment practices insurance. Additionally, you should also consider investing in umbrella insurance, which would cover you for any damages in excess of your other individual policies.

Finally, if you are considering letting insurance wait, or not making insurance a priority, remember this: anyone can sue anyone at any time for anything. You don’t even have to have done anything wrong to get sued. Yet whether you are in the wrong or in the right, if you do get sued, you’ll need to pay big money to hire a lawyer to defend you. With the right insurance in place, your insurance will cover paying that lawyer to defend you—and that could be the most important reason to get insurance.

Before you sit down with an insurance agent, meet with us, your Personal Family Lawyer® with business planning expertise. We’ll look at your business assets and underlying risks to identify the optimal levels of coverage you should have in place.

3. Legal Agreements

Legal agreements are very likely the most important part of your asset protection plan. Legal agreements protect your company’s most essential elements: your personal liability, personal and professional relationships, intellectual property, and trade secrets, to name just a few.

In addition, legal agreements govern the rights and responsibilities of every party you do business with, from clients and vendors to employees and contractors. Given the importance of such documents, you should never rely on generic legal forms you find online when creating your business agreements. Instead, reach out to us, your local Personal Family Lawyer® with business planning expertise to support you in creating, reviewing, and updating your company’s legal documents to ensure you have the most robust legal protections in place at all times.

When creating legal agreements, remember this: the most important part of your legal agreements are the process by which you reach an agreement as well as the clarity of the documented terms, so if there is a later dispute, you’ve already established how you will handle and resolve conflict. Template form documents, or “cheap legal” in the form of a lawyer who really doesn’t understand the relational aspects of your business, simply won’t cut it. You want to work with a relational lawyer who understands how to keep businesses out of court and conflict.

If you are going it alone with legal agreements, be sure to enter into all agreements in the name of your business entity, not in your personal name. And whenever possible, be sure that your legal agreements include provisions requiring conflict resolution through mediation and arbitration before litigation, which should always be a last resort.

Furthermore, in certain cases, the terms of your business agreements can be designed to limit the level of liability and potential damages your business would face should a dispute arise. However, when it comes to limiting liability through legal agreements, state law varies widely, so your agreements should be prepared and reviewed by a business attorney licensed in our state like us, your Personal Family Lawyer® with business planning expertise.

4. Trusts

Business entities protect your personal assets from the activities of your business, but by using a specially designed irrevocable trust, you can protect your business from your personal activities. Such trusts are set up so your business is owned by the trust, not you, and since you can’t lose what you don’t own, your company and its assets can’t be reached by your creditors or any lawsuits against you due to your personal activities, such as a serious accident, bankruptcy, or divorce.

To be clear, asset protection trusts are not the same as living trusts designed to protect the inheritance you want to leave for your family and avoid the court process of probate in the event of your death or incapacity. Living trusts are revocable, meaning you still own the assets held by the trust while you’re alive, and as such, you can dissolve the trust or change its terms at any point during your lifetime.

Since you retain ownership of assets held by revocable living trusts, a revocable living trust does not provide your business with any asset protection from creditors or lawsuits. Asset protection trusts, however, are irrevocable.

The most airtight asset protection is provided when you never own your business to begin with, and when the business is started by you as the trustee of an irrevocable trust set up for you by a parent, grandparent, or other relative. Additionally, if you anticipate growing the value of the business significantly, this kind of trust can also protect you from estate taxes. 

The one hitch with such trusts is that you have to have parents or grandparents who thought ahead and left you an inheritance inside an irrevocable trust at their death, or who are willing to set up an asset protection trust for you during their lifetime, so you can start your business with this level of protection.

On the other hand, if your business is already up and running and you want to protect it using asset-protection trusts, you can transfer your business into a creditor-shielded asset protection trust. However, in this case, there are many restrictions, and your protections will only begin after several years, depending on the state in which the trust is established.

In either case, if an asset protection trust is something you’d like to consider for your business, contact us, your Personal Family Lawyer® with business planning expertise to discuss your options.

Get Professional Support From a Personal Family Lawyer® With Business Planning Expertise

To make certain that your asset protection strategies are put in place and maintained properly, working with an experienced business lawyer like us is a must. Whatever you do, don’t try to handle your asset protection planning yourself by using online incorporation services, do-it-yourself online legal documents, or by purchasing a prepackaged asset-protection plan. These options are a recipe for disaster; asset protection requires complex planning and real legal experience, and you could lose both your business and personal assets if you get things wrong.

Rather than trying to go it alone, get professional support by having us develop your asset protection plan. As your Personal Family Lawyer® with business planning expertise, we will support you to create, implement, and enforce a full array of asset protection strategies at every stage of your company’s evolution. Call today to schedule an analysis of your business’ current risk exposure, so we can ensure your company’s legal foundation is strong enough to withstand whatever threats you might face both now and in the future.

This article is a service of a Personal Family Lawyer™. We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, financial, and tax systems you need for your business. Call us today to schedule.

The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

We offer a complete spectrum of legal services for business owners and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death. We also offer you a LIFT Your Life And Business Planning Session, which includes a review of all the legal, insurance, financial, and tax systems you need for your business. Schedule online today.

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