What Do You Do If Your Business is in Financial Trouble?
This is a transcript of a podcast posted November 3, 2006.
 This week our topic is financially troubled businesses, and we’ll be speaking with Attorney Fred Steingold, author of the best-selling title, Legal Guide for Starting and Running a Small Business.
NOLO: Fred, your book, Legal Guide for Starting and Running a Small Business, covers a lot of material. It’s easy to see why it’s one of the best-selling guides on the subject. But in this broadcast, we’re particularly interested in your chapter about the financially troubled business. One of the things you mention in that chapter is that a businessperson needs to think ahead to protect personal assets. How does a person develop an asset protection plan?
 FRED STEINGOLD: Let’s say you own a home, a car, you’ve got stocks and bonds, you’ve got a savings account… those are your personal assets. You’ve worked hard probably to acquire those things, and you want to protect those assets to the greatest extent possible in case your business fails. You don’t want to have some creditor seize those assets to pay for business debts, so your asset protection plan is all about protecting those assets, and it starts with your choice of entity. By that, I mean how you’re going to do business, and how your business is going to be structured.
There are two basic ways. One is either having a sole proprietorship or a partnership, and in either of those cases, you’ve got complete exposure. If you’re a sole proprietor, for example, all of your assets are at risk for whatever the business does. If you have a partnership, each partner is personally reliable for all the business debts, and so, you’re completely at risk.
Now, the opposite of that is the corporation or the limited liability company (we sometimes call that an LLC), and in that case, your exposure is limited, and the reason is this: the law treats a corporation or an LLC as an entity that’s separate from the owner. You’re a shareholder in a corporation, you’re a member of an LLC, and those are different from being the business itself, so for people who are concerned about asset protection, it’s a much better choice to have either a corporation or an LLC. Granted it costs a little more to set these up and there’s a little paperwork involved, but the tradeoff is that you have greater piece of mind. So, that’s one step if you’re going to have an asset protection plan.
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