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Does A Corporation Protect Your Personal Assets From Creditors?

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Starting a business involves a lot of risks and pitfalls if you don’t do it properly. If you want your startup to succeed, you should look beyond ensuring your company makes profits. You must also know how to protect your personal assets from debts and lawsuits.

May 23, 2023
Author: NCH

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Personal asset protection plays an important role in your startup’s success. They help reduce potential risks that threaten your business and your assets. But how do you guarantee strong asset protection for yourself? 

If you want to learn how to protect your personal assets from creditors and lawsuits, you’ve come to the right place. In this blog, we’ll discuss how you can reduce risk exposure by incorporating your business.

How to Protect Your Personal Assets From Your Business

There are plenty of personal asset protection strategies you can use. You can create trusts or look for liability insurance policies. However, out of all of them, incorporating is the most popular one. 

Incorporating is one of the easiest ways you can protect your personal assets. It allows you to create a clear distinction between you and your business by giving it its own legal entity. 

You can choose from many entities or structures, but not all can protect you from risks. Consider turning your startup into a corporation if you want strong personal asset protections.

How Does A Corporation Work

Corporations are legal entities that are separate from their owners or shareholders. They can enter contracts, own assets, borrow money, and hire employees. Moreover, they’re run by a board of directors elected by the shareholders. 

Each shareholder owns a percentage of the company, depending on their share. These shares can be bought or sold, which is a big advantage in continuity and longevity. 

Now, there are two types of corporations: C and S corporations. C-corps are the most common type you can see in the country. They can have as many shareholders as they want, with each shareholder getting personal asset protection. 

The only downside to this structure is being taxed twice. C-corps have to pay corporate taxes, depending on where they are. Moreover, their shareholders are also taxed depending on the dividends they get from the company. 

Meanwhile, S-corps avoid double taxation altogether. S-corps are pass-through entities, which means their income, losses, and taxes pass through their shareholders. If you choose this structure, your company’s taxes will be included in your tax returns. 

This type of corporation sounds great, especially if you want more tax savings. However, they have more requirements compared to C-corps. For instance, you can’t have partners and more than one class of stock. 

Does A Corporation Protect Your Personal Assets From Creditors?

Yes, they can. Whatever you choose, both types offer you personal asset protection. Since corporations are considered separate entities from their owners, they won’t be held liable for any legal obligations their companies take. 

For example, if your company gets into debt, creditors can only go after its assets to satisfy their claim. They have no right to seize the shareholders’ assets. 

Now, there are a few limitations to this rule that you need to keep in mind. For instance, if creditors think you’re only using the corporation to escape liability, they can go after your assets by proving their theory. 

This strategy is called “piercing the corporate veil.” It’s what creditors do if they think that the corporation was created as an alter ego of the shareholder. If they can prove this in court, they hold the shareholder liable for the company’s debts. 

Another limitation you must remember is signing a contract using your name. You need to sign contracts on behalf of your corporation, or else you can be held liable for them. 

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Maximizing Your Personal Asset Protection

Besides incorporating, there are other strategies you could use to strengthen your personal asset protection. Here are a few examples:

Asset Protection Trusts

This type of trust specifically protects your personal assets from creditors. It transfers some of your holdings into a trust managed by an independent trustee. 

It is an irrevocable trust, meaning it can’t be changed or altered. Creditors can’t go after them since you can’t be sued for assets you no longer control. 

If you want to put your assets in this kind of trust, we suggest you work with a provider that specializes in them. This way, you can guarantee that your trust meets your state’s regulatory requirements. 

Umbrella Insurance

Some policies can protect you and your holding from lawsuits against your company. For instance, if you lose a lawsuit, umbrella insurance can protect your existing and future personal assets. 

Umbrella policies can be purchased for personal or business use. They typically cost an average of $300 to $500 a year, depending on where you live and the coverage you want. 

As a rule, this type of insurance doesn’t cover any criminal or negligent action. Even if you have umbrella insurance, it’s important you still use proper procedures on your contracts. 

Retirement Plans

Believe it or not, retirement plans can help protect your assets. If you contribute the maximum amount allowed to retirement plans, like the 401(K), you can protect your holding from creditors. 

However, IRAs only have limited protection. Most have a $1 million cap for bankruptcy proceedings.

Like trusts, we recommend you work with an expert in retirement and succession planning who can help. They can guide you in creating a strategy to protect your holdings from creditors and lawsuits.

Protect Your Assets Today

Incorporating is a powerful strategy you can use to take your business to the next level. Not only will it protect your personal assets, but it’ll also help you gain more tax savings. 

If you need help figuring out how to incorporate in Nevada, look no further than NCH. 

NCH is one of Nevada’s leading business formation services providers. Our business specialists have helped countless businesses incorporate in Nevada. We also offer retirement and trust planning for maximum asset protection. 

With our help, you can rest easy knowing your hard-earned investments are safe and protected. Find out how we can help you protect your personal assets by visiting our website

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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