By: Barry E. Haimo, Esq.
November 10, 2015
Asset Protection Plan: Why You Need to Separate Yourself from Your Business
As the old saying goes, “It’s not what you make, it’s what you keep that counts.”
This tidbit of wisdom can be applicable to anyone, but it rings especially true for business owners. Anyone who starts a business may end up exposing him or herself to certain financial and legal risks; creditors’ claims, lawsuits, and other debts and legal liabilities. Without an appropriately tailored asset protection plan, you can end up losing a devastating amount of both business and personal assets. Alternatively, with a comprehensive asset protection strategy in place that helps you separate yourself from your business, you can minimize risks by safeguarding your assets from creditors and predators.
For an example of a particularly effective asset protection plan for business, consider the story of Eleanor Pearson and her restaurant business, Pearson’s Pies.
A Taste for Good Food and a Mind for Business
No one who knew Eleanor Pearson as a child would be surprised she grew up to own her own restaurant. Even as a 3-year-old, Eleanor was a passionate foodie, turning down typical toddler fare like cheese sandwiches and hot dogs for more complex and interesting concoctions. Her talent in the kitchen surfaced by age 6, when Eleanor began helping her mother prepare dinner for her four brothers. She was a natural cook, who cracked eggs with grace and frosted cupcakes with elegance.
In school, Eleanor aced her home-economics classes and was a favorite at school bake sales. As soon as she was old enough, she began working at a local Tapas restaurant and spent every second she could learning from the chef and other cooks.
Eleanor attended culinary school in San Francisco after graduating from high school, where she cultivated her passion for baking. She returned to her small town home in Florida with one goal—to open the town’s first—and best—pie shop: Pearson’s Pies.
Fortunately, Eleanor soon found that she was nearly as talented at business as she was at cooking. She rented a cheerful property in the center of town and quickly began baking the most delicious sweet and savory pies the locals had ever known—from crusty cheddar and spinach pies speckled with cloves of caramelized garlic to sweet bourbon ginger pie with crunchy pecans. Her specialty—a dark chocolate stout cream pie garnished with chocolate shavings—quickly became a favorite, and would sell out by early morning during the holiday season.
Eleanor’s delicious pies had plenty of fans across town, but there was one fan in particular who loved her pies a little too much. The mayor of their town fell in love with her pies the moment he first tried his bite of her cherry ginger cobbler after popping into her shop on a whim. The mayor would order a new pie every week, and would enjoy a slice after dinner. But one slice of pie after dinner eventually turned into two, sometimes three slices of pie after dinner. Soon, he even began bringing in a slice of pie to enjoy after his lunch at the mayor’s office. At his next doctor’s appointment, he was unpleasantly surprised to find he’d gained 30 pounds, and to hear from his doctor that he needed to change his eating habits—and fast.
His doctor referred him to a specialist and recommended he join a gym. The mayor was very upset—so upset, in fact, that he decided to boycott Pearson’s Pies, claiming they were putting the citizens and their children at risk for obesity and diabetes.
He was a fairly influential figure in town, being not only the mayor but a popular minister and long-time Boy Scout troop leader. Many people felt his campaign to embargo Pearson’s Pies was a little silly, but it was enough to make Eleanor’s business take a dive for several long, hard months. As a new business owner, Eleanor was forced to take out hefty loans to stay afloat, and it wasn’t long before creditors came after her business, and her personally.
Fortunately, Eleanor, being the crafty business woman she was, was prepared. She knew that any venture involving customers, creditors, suppliers, and employees has the potential to create liability. That’s why she had developed an asset protection plan with the help of her estate planning attorney. She had created a Limited Liability Company (LLC) to protect her personally from liability, and kept her business and personal accounts separate.
She’d worked with her attorney to minimize the assets vulnerable to creditors by distributing them across a 401k account, trusts, and holding companies. She was able to leverage the homestead exemption to protect her home. Because she had taken precautions to protect her assets, her creditors were forced to settle for far less rather than pursue a long and expensive economic war.
Readers may be happy to learn that the weight-loss drama blew over eventually, and Pearson’s Pies returned to being a thriving local business. The mayor was able to lose his extra pounds, and even went back to treating himself to a slice of pie from her restaurant on special occasions.
Business owners would do well to take a page from Eleanor Pearson’s book. Owning and operating a business can be full of risks and pitfalls. If you want to protect your business and personal assets from creditors and lawsuits, it’s important to develop a comprehensive asset protection plan. Consult with a skilled estate planning attorney to learn more effective strategies you can use to protect not just your business, but your personal assets as well.
Barry E. Haimo, Esq.
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