Asset Protection for Women-Owned Businesses

There’s generally no set form for use in developing a business plan, but most plans cover these essential elements:

• An executive summary, which briefly describes your business as a whole and touches on your business’s profile and goals
• An in-depth explanation of the history and development of your business
• A summary of your products and/or services
• A customer description, market analysis, and competitor analysis
• A description of your business’s legal entity (e.g., corporation, partnership, sole proprietorship) and management organization
• An explanation of your marketing plan and sales strategy
• A capitalization plan including projected revenues, cash flow projections, pro forma financials, and an explanation of how you’ll use funds

Selecting a business entity for asset protection

One of the first decisions you’ll need to make is what form of legal entity your business will take.

If you’re starting a business from scratch (as opposed to buying an established business), your options are many. The type of entity you select is important because it can determine:

• the types of permits you’ll need,
• where and how your business should be registered,
• the extent of protection from personal liability you’ll receive, and
• the amount and form of taxes that may have to be paid.

While it’s a good idea to consult a financial or legal professional before selecting the type of entity for your business, here’s a brief description of the more common forms of business structures.

Sole proprietorship

A sole proprietorship is the most straightforward way to structure your business entity.

As a sole proprietor, your business is simply an extension of you. Sole proprietors are liable for all business debts and other obligations the business might incur. This means your personal assets can be subject to the claims of your business’s creditors.

Partnership

A partnership is a business entity where two or more people enter into a business relationship for mutual profit. Partnerships are organized in accordance with state law.

In a general partnership, all partners can act on behalf of one another in furtherance of partnership business, which means each partner is personally liable for the acts of the other partners, and all partners are personally liable for the debts and liabilities of the partnership.

Limited partnerships and limited liability partnerships may provide some liability protection for partners according to the state law where the partnership is formed.

Corporations

There are several different types of corporations.

Generally, two advantages of corporations are that they provide a shield from individual liability and are the easiest type of entity to use to raise capital.

Some common types of corporations are S corporations and limited liability corporations or companies. S corporations and most limited liability corporations pass income, gains, deductions, and losses of the business through to the shareholders. By comparison, a C corporation is taxed as a separate entity.

Financing your business

Your business plan is in place. Now you have to figure out where you’ll get the funds to set your dream in motion--and sustain it.

The first step in determining your financing needs is to develop a line-item budget, projected over a period of months and/or years.

Next, you’ll need to figure out how to finance your business. The two general categories of financing available for businesses are debt and equity:

• Debt requires repayment of a loan.
• Equity involves raising capital by selling parts of the business to investors.

One place to look for capital might be your own assets. You may be able to raise money for the business from your savings or borrow against a retirement plan, life insurance policy, credit card, or the equity in your home.

Another common source of funds for new businesses is what’s called “friends and family.” However, such funding is most likely to be successful if it’s structured in a businesslike way, with clear terms of repayment or ownership participation.

You can apply to banks or credit unions for loans.

The Small Business Administration has a website devoted to women-owned businesses. There you can find resources to help you start and finance your business.

Also, there often are state and local agencies that provide financial assistance to new businesses located within your geographic area.

Anything else?

• There are plenty of other things to consider, such as taxes, licenses, fees, and permits.
• You’ll need to think about where to locate your business and how you’ll market it.
• Will you have employees?
• Will you add a retirement plan? If so, you’ll have regulatory requirements and tax responsibilities, as well as possible workers’ compensation to consider.

But you don’t have to go it alone. There are experts available to serve as mentors or counselors.

Check the Women’s Business Resources section of the Small Business Administration website for information on locating a mentor.

Women-Owned Business: Taking Control of Your Finances

As a woman, you have financial needs that are unique to your situation in life.

Perhaps you are starting your own business or would like to buy your first home. Maybe you need to start saving for your child’s college education. Or you might be concerned about planning for retirement.

Whatever your circumstances may be, it’s important to have a clear understanding of your overall financial position.

That means constructing and implementing a plan. With a financial plan in place, you’ll be better able to focus on your financial goals and understand what it will take to reach them.

The three main steps in creating and implementing an effective financial plan involve:

• Developing a clear picture of your current financial situation
• Setting and prioritizing financial goals and time frames
• Implementing appropriate saving and investment strategies

Developing a clear picture of your current financial situation

The first step to creating and implementing a financial plan is to develop a clear picture of your current financial situation. If you don’t already have one, consider establishing a budget or a spending plan.

Creating a budget requires you to:

• Identify your current monthly income and expenses
• Evaluate your spending habits
• Monitor your overall spending

To develop a budget, you’ll need to identify your current monthly income and expenses.

Start out by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support.

Next, add up all of your expenses. If it makes it easier, you can divide your expenses into two categories: fixed and discretionary.

• Fixed expenses include things that are necessities, such as housing, food, transportation, and clothing.
• Discretionary expenses include things like entertainment, vacations, and hobbies.

You’ll want to be sure to include out-of-pattern expenses (e.g., holiday gifts, car maintenance) in your budget as well.

To help you stay on track with your budget:

• Get in the habit of saving – try to make budgeting a part of your daily routine
• Build occasional rewards into your budget
• Examine your budget regularly and adjust/make changes as needed

Setting and prioritizing financial goals

The second step to creating and implementing a financial plan is to set and prioritize financial goals.

Start out by making a list of things that you would like to achieve. It may help to separate the list into two parts: short-term financial goals and long-term financial goals.

Short-term goals may include making sure that your cash reserve is adequately funded or paying off outstanding credit card debt.

As for long-term goals, you can ask yourself:

• Do you want to start your own business?
• Would you like to purchase a new home?
• Do you want to retire early?
• Would you like to start saving for your child’s college education?

Once you have established your financial goals, you’ll want to prioritize them. Setting priorities is important, since it may not be possible for you to pursue all of your goals at once.

You will have to decide which of your financial goals are most important to you (e.g., sending your child to college) and which goals you may have to place on the back burner (e.g., the beachfront vacation home you’ve always wanted).

Implementing saving and investment strategies

After you have determined your financial goals, you’ll want to know how much it will take to fund each goal. And if you’ve already started saving towards a goal, you’ll want to know how much further you’ll need to go.

Next, you can focus on implementing appropriate investment strategies.

To help determine which investments are suitable for your financial goals, you should ask yourself the following questions:

• What is my time horizon?
• What is my emotional and financial tolerance for investment risk?
• What are my liquidity needs?

Once you’ve answered these questions, you’ll be able to tailor your investments to help you target specific financial goals, such as retirement, education, a large purchase (e.g., home or car), starting a business, or increasing your net worth.

Managing your debt and credit

Whether it is debt from student loans, a mortgage, or credit cards, it is important to avoid the financial pitfalls that can sometimes go hand in hand with borrowing. Any sound financial plan should effectively manage both debt and credit.

The following are some tips to help you manage your debt/credit:

• Make sure that you know exactly how much you owe by keeping track of balances and interest rates
• Develop a short-term plan to manage your payments and avoid late fees
• Optimize your repayments by paying off high-interest debt first or take advantage of debt consolidation/refinancing

Some credit traps to avoid:

• When using revolving credit, avoid spending more than you can pay off at the end of each billing cycle
• Be aware of hidden interest and fees
• When transferring balances to take advantage of low interest rates, be sure to pay off outstanding balances before the teaser rate expires
• Be sure to make payments on time; otherwise it could negatively affect your credit report

Understanding what’s on your credit report

An important part of managing debt and credit is to understand the information contained in your credit report. Not only does a credit report contain information about past and present credit transactions, but it is also used by potential lenders to evaluate your creditworthiness.

What information are lenders typically looking for in a credit report?

For the most part, a lender will assume that you can be trusted to make timely monthly payments against your debts in the future if you have always done so in the past. As a result, a history of late payments or bad debts will hurt your credit.

Based on your track record, if your credit report indicates that you are a poor risk, a new lender is likely to turn you down for credit or extend it to you at a higher interest rate. In addition, too many inquiries on your credit report in a short time period can make lenders suspicious.

Today, good credit is even sometimes viewed by potential employers as a prerequisite for employment – something to think about if you’re in the market for a new job or plan on changing jobs in the near future.

Because a credit report affects so many different aspects of one’s financial situation, it’s important to establish and maintain a good credit history in your own name. You should review your credit report regularly and be sure to correct any errors on it.

You’re entitled to a free copy of your credit report from each of the three major credit reporting agencies once every 12 months. You can go to www.annualcreditreport.com for more information.

Working with a financial professional

Although you can certainly do it alone, you may find it helpful to work with a financial professional to assist you in creating and implementing a financial plan.

A financial professional can help you accomplish the following:

• Determine the state of your current affairs by reviewing income, assets, and liabilities
• Develop a plan and help you identify your financial goals
• Make recommendations about specific products/services
• Monitor your plan
• Adjust your plan as needed

Keep in mind that unless you authorize a financial professional to make investment choices for you, a financial professional is solely there to make financial recommendations to you. Ultimately, you have responsibility for your finances and the decisions surrounding them.

There is no assurance that working with a financial professional will improve investment results.

Women-Owned Business and Asset Protection: How Insurance Can Help

Women are successful professionals, business owners, and knowledgeable investors. At some point in their lives, women may have to manage their own finances due to divorce, widowhood, or remaining single.

Every day, women face a variety of risks to their life, their health, and their property.

Although you can’t eliminate many of these risks, you can take steps to guard against resulting financial losses.

Insurance is the primary way to provide needed protection. It can provide both peace of mind and financial security to you and your loved ones. Many types of insurance are available to help guard against devastating losses.

Insurance is an important part of your asset protection plan. A good asset protection plan should attempt to recognize potential problems before they arise, shield your assets from potential legal liability, and protect your property, possessions, and income from creditor claims.

Life insurance

Life insurance provides funds for your loved ones when you die.

If you’re a working woman, your income can have a significant impact on the quality of your family’s lifestyle, even if you’re part of a two-income household. Life insurance protects your family by providing proceeds that can be used to replace your lost income if you die prematurely.

Maintaining a household is a full-time job, and you have many important roles and duties. If you die, your surviving spouse may have to pay for services such as child care, transportation for children, and housekeeping. Proceeds from your life insurance can help your spouse pay for these services.

Many women find themselves providing care for both children and elderly family members. Unfortunately, these added financial responsibilities often continue after your death. Life insurance provides a source of funds that can be used to help pay for these expenses as well.

Life insurance is especially important for women business owners

If you die while owning your business, life insurance can be used to provide cash for company expenses such as payroll or operating costs while your estate is being settled. Also, life insurance can be a useful tool for women business owners structuring buy-sell arrangements or providing benefits to key employees.

Health insurance

Health insurance can safeguard your assets from the high costs of health care.

You may lack the financial resources needed to pay medical expenses associated with a health crisis, and the costs of physical exams, prescription drugs, hospital stays, pregnancy, and routine medical conditions can add up and cause you to suffer financial hardship if you must pay for them entirely on your own.

Frequently, women obtain their health insurance through their employer or as a dependent in a family health plan.

If health insurance isn’t available through an employer, you may be able to obtain coverage through an association, club, or other organization or on your own by purchasing a private health insurance policy directly from an insurance company.

Generally, health insurance pays for all or a portion of specified medical costs. The cost and range of protection that your health insurance provides will depend on your insurance company and the particular policy you purchase.

Auto insurance

There are many reasons why you should have automobile insurance:

• People can be injured and property damaged as a result of an automobile accident.
• Liability claims against you can put your assets at risk.
• Loss or damage to your auto can also occur through theft, vandalism, or natural disasters.

Auto insurance protects you against these risks.

A personal auto policy is a contract between you and your insurer that specifies each party’s rights and obligations. State law and/or your auto lender may require that you purchase at least a minimum amount of coverage.

Depending on your circumstances, you may want to buy additional protection. You can compare auto insurance policies in terms of price, coverage, exclusions, and reputation of the insurer.

Homeowners insurance

If you own a home, either with someone else or on your own, it’s probably one of your most valuable assets. So it’s important that you protect yourself against unexpected financial loss to your home and possessions.

• Homeowners insurance provides coverage if your home and possessions are damaged or destroyed.
• It can also provide you with coverage for liability claims, medical expenses, and other expenditures that result from property damage and bodily injury suffered by others.

If you have a mortgage on your home, your lender typically will require homeowners insurance.

Even if you own your home outright, you should still consider buying homeowners insurance to protect your interests and safeguard your assets.

The cost of homeowners insurance depends on several factors, including the amount of your coverage, any endorsements you add to the policy, and policy deductibles. Condominium and co-op insurance, although similar, differ in some respects from standard homeowners insurance. And if you rent your home, you may want to look into insurance for your contents.

Umbrella insurance

For additional protection, consider umbrella insurance. Umbrella liability insurance (ULI) provides additional liability coverage in excess of the liability coverage provided by other insurance policies, such as homeowners, renters, and auto insurance.

By providing liability protection above and beyond these basic coverages, ULI can protect you against the catastrophic losses that can occur if you are sued.

Disability insurance

The threat of a major disability poses one of the greatest risks to your income.

Disability insurance is important in protecting your income, especially if you’re not able to work for an extended period of time.

Becoming disabled for any significant length of time can dramatically affect your finances. Yet it’s not uncommon to underestimate the likelihood of becoming disabled and to overestimate your available resources. That’s why disability insurance can play an important role in protecting your income and maintaining your financial well-being.

Disability insurance helps protect your income by paying you a benefit that replaces part of your earned income (typically 50% to 70%) when you can’t work.

You may be able to obtain short-term or long-term disability coverage, or both.

In general, disability insurance can be split into three types:

• private insurance (individual policies bought from an insurance company),
• group policies typically provided through your employer, and
• government insurance, such as Social Security disability benefits and social insurance provided through state governments.

If you’re applying for benefits under a private insurance policy, you’ll probably be subject to a waiting period (elimination period) before benefits are paid.

Long-term care insurance

Your chances of needing long-term care increase as you get older.

It’s particularly important for women to plan for the potential expenses of long-term care since they are more likely to need long-term care than men due to longer life expectancy.

Long-term care insurance pays a selected dollar amount per day (for a set period) for the type of long-term care described in the policy.

Depending on the benefits you select, care can be provided in a variety of settings, including:

• your residence,
• assisted-living facilities,
• adult day-care centers,
• hospices, and
• nursing homes.

Most policies pay benefits when the insured experiences certain physical or mental impairments. The cost of insurance is based on:

• the insurer,
• the age of the insured,
• the health of the insured, and
• the benefits selected.

Business insurance

Owning a business often requires you to make a significant investment of your time and finances. You don’t know what difficulties may lie ahead for your business, so you need to be protected.

Whether you are just starting a business out of your home, or you manage a multimillion dollar enterprise, no matter how careful you are in running your business, accidents happen.

As a business owner, you may be interested in several different types of insurance coverage:

• property and casualty insurance,
• liability insurance,
• and group health, life, and disability insurance coverage for you and your employees.

You can buy these types of insurance separately, or you may be able to purchase a package of insurances covering many different potential hazards.

A last word on insurance

The bottom line is if you haven’t developed and implemented an asset protection plan, your wealth and assets are vulnerable to potential future creditors, and you could suffer significant financial hardship.

Insurance can be a vital asset protection tool in your arsenal against the many different risks that could result in devastating losses.

Asset Protection for Women-Owned Business: Beyond Insurance

As women continue to work and earn money, become the main breadwinners, and run their own businesses, it’s important to take measures to protect your lives, businesses, and simply the things you own. That’s why asset protection planning has become so vital for women.

Asset protection planning is the process of arranging your financial affairs to prevent (or at least minimize) the risk of your assets being used to satisfy claims of future creditors or claimants.

Generally, an asset protection strategy should dissuade potential creditors from pursuing an action against you, and protect your personal assets from being seized to satisfy a creditor’s judgment.

Asset protection is not intended to hide assets, defraud creditors, or evade the payment of taxes. In fact, if a court finds that your asset protection plans were made with the intent to defraud, it will disregard those plans and make the assets available to creditors.

Why is asset protection planning important for women?

Women, now more than ever, need to consider asset protection planning because:

• Women live longer than men and will likely need their money to last longer
• At some point in their lives, women may have to manage their own finances due to divorce, widowhood, or remaining single
• Many women are successful business owners
• A good asset protection plan can help you achieve financial security and independence, and give you an opportunity to have enough money to provide for your comfortable support and that of your dependents

Insurance as part of your asset protection plan

Often, the simplest way to protect assets is by shifting the risk to an insurance company. This should generally be your first line of defense. However, insurance may not provide all the protection you need, or it might not be available.

Other asset protection strategies generally involve transferring legal ownership of assets to other persons or entities, such as corporations, limited partnerships, and trusts. The logic behind shifting ownership of assets is fairly straightforward: your creditors can’t reach assets you don’t own.

Asset protection planning with business entities

You might be a business owner, or thinking about starting a business. If so, choosing a business entity is an important decision. A number of issues should be considered when selecting a form of business entity, including tax considerations.

Consult an attorney and tax professional before shifting assets to a corporation or other business entity.

C corporations

One option is a C corporation. The law views a C corporation as a separate legal entity. As such, business assets owned by a C corporation are considered separate from your personal assets, which will generally not be at risk for the liabilities of the business.

However, protection from liability may be lost if the business does not act like a business, such as when the business acts in bad faith, fails to observe corporate formalities (e.g., organizational meetings), has its assets drained (e.g., unreasonably high salaries paid to shareholder-employees), is inadequately funded, or has its funds commingled with shareholders’ funds.

Limited liability company (LLC)

An LLC is a hybrid of a partnership and a C corporation.

An LLC is generally taxed like a partnership with income and tax liabilities passing through to its members (and not double-taxed as with a C corporation), but it is viewed as a separate legal entity and can be used to own business assets, protecting your personal assets from business claims against the LLC.

While the legal formalities are based on state law, the legal requirements to form and maintain an LLC are usually not as involved as those associated with a C corporation.

Professional corporation (PC), limited liability partnership (LLP)

Many professionals, such as lawyers, doctors, dentists, and accountants, face liability for damages that result from the performance of their professional duties.

While no business structure will protect you from personal liability for your own professional activities, states have enacted laws allowing professionals to join together to form professional corporations wherein all participating corporate members are of the same profession.

An alternative form of business entity suitable for professionals is the LLP. Both an LLP and PC protect you from the professional mistakes of your partners. That is, if one of your partners is sued for negligence, and the PC or LLP is also named in the lawsuit, the partner sued may be liable personally for any judgment, but the PC or LLP should protect your personal assets from the reach of any judgment creditor of the entity.

Many professionals, such as lawyers, doctors, dentists, and accountants, face liability for damages that result from the performance of their professional duties. Both an LLP and PC protect you from the professional mistakes of your partners.

Family limited partnership (FLP)

An FLP is a limited partnership formed by family members only.

Assets that you own, such as a closely held business or any real estate (other than your residence), may be placed in the partnership.

Generally, a creditor can only obtain a charging order against the FLP, which allows the creditor to receive any income distributed by the general partner (who is usually a family member). It does not allow the creditor access to the assets of the FLP. Thus, a charging order is not an attractive remedy to most creditors, and consequently, its limitations might convince a creditor to settle on more reasonable terms than might otherwise be possible.

Asset protection planning with protective trusts

Protective trusts are intended to protect your assets and/or estate from creditor claims, lawsuits, an unwanted beneficiary, or other threats.

Generally, protective trusts pay income to the beneficiary you name in the trust.

The trust also can be set up to pay out for a specific purpose, such as education expenses, or care for a beneficiary with special needs.

In fact, you can name yourself as the beneficiary to ensure payment of income while protecting the trust assets from creditors and lawsuits. Your creditors are only able to reach assets in the trust to the extent of your beneficial interest in those assets. If you have no right to the assets of the trust, your creditors can’t reach them. On the other hand, if you’re entitled only to trust income, that’s all your creditors can seek to attach.

Irrevocable trusts

For an irrevocable trust to be effective as an asset protection tool, you must not be able to revoke or change the trust once you establish it.

This means you can’t dissolve the trust, change beneficiaries, remove assets from the trust, or change its terms. But because you relinquish control over the assets you place in the trust, they’re generally beyond the reach of your creditors as well.

In addition, by adding special language to your trust through a spendthrift clause, you can further protect trust assets from your beneficiaries’ creditors.

A revocable trust, unlike an irrevocable trust, generally does not protect trust assets from creditor claims since you have control over those trust assets.

Domestic self-settled trusts

The laws in a few states, such as Alaska, Delaware, Missouri and Nevada, enable you to set up a domestic self-settled trust.

You can create this type of trust, transfer assets to the trust, and name yourself as beneficiary.

The key to a self-settled trust is that it gives the trustee discretion over whether or when to distribute trust property or income to beneficiaries. Creditors can only reach property that the beneficiary has a legal right to receive. Therefore if you, as a trust beneficiary, don’t have access to trust property, your creditors will be unable to reach it as well.

Offshore (foreign) trusts

Many foreign countries have laws that make it difficult for creditors to reach trust assets held in that foreign country.

In order for a creditor to reach assets held in a foreign or offshore trust, a court must have jurisdiction over the trustee or the trust assets. A trust that is properly established in a foreign country generally does not allow jurisdiction of a U.S. court over the trustee. A U.S. court will be unable to exert any of its powers over the offshore trustee.

For a creditor to assert a claim against trust assets, the suit must commence in the foreign jurisdiction, with a lawyer licensed to practice in that foreign country.

In addition, the creditor will probably have to post a bond with the foreign court. Taken as a whole, these obstacles have the general effect of deterring creditors from pursuing actions in the foreign court.