Cover Your Assets

Can your company's creditors touch your home or your car? Not if you plan well in advance.

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Finance

When the economy gets rocky, smart company owners separate their business and personal resources

At first glance, a swimming pool might seem completely irrelevant to managing a fast-growing company. But for Bob Bickert, CEO of Crown Products, in Mobile, Ala., a manufacturer of promotional products and #140 on last year's Inc. 500 list, there is a strong connection.

"Until recently, we operated only within a strong economy," Bickert says. "We had done so well that I had decided to install a swimming pool at home for my family. But as the economy has turned tougher, I changed my mind about that -- along with making a number of other business and personal financial decisions that should strengthen our ability to withstand whatever problems may occur."

In anticipation of customers' tighter budgets, for example, Bickert has added a low-priced product line to Crown Products' mix. He's also made significant cutbacks in his personal compensation -- mainly by scaling back on bonuses -- to keep more cash in the company's coffers.

For lack of a better term, call what Bickert is doing "downside planning." In its ideal form, business owners find ways to protect their personal assets while preparing for the worst for their business. In the current challenging economic environment, a company's worst-case scenarios might include the bankruptcy of its biggest and once-best customer, a banker's decision to close down its corporate credit line, the postponement or cancellation of an impending initial public offering, or the meltdown of a company's value.

As Bickert's actions show, downside protection can take many forms. But whatever your own company's specific needs, there are two issues that every business owner should focus on: asset diversification and protection from creditors.

According to Roy Ballentine, a certified financial planner with Ballentine, Finn & Co. in Wolfeboro, N.H., asset diversification makes sense in every type of economic climate. He says: "When I'm dealing with a business owner, I always try to point out to him or her that concentration of assets is a very risky proposition. That means you're always in a financially precarious position when most or all of your assets are tied up in a single entity, whether that's your own company or anyone else's."

Ballentine urges his entrepreneurial clients to accumulate personal assets outside their companies as soon as corporate cash flow can support decent owners' compensation. "What you want to do is keep these funds in a well-diversified group of fairly liquid investments. That way, if your company loses value or even goes under, you'll still have sheltered a portion of your household's assets," Ballentine says.

Unfortunately, it's much harder for owners to diversify their personal assets during lean business times than when the stock market is surging, along with the company's cash flow. So if you find yourself forced to cut back on your compensation -- or even to cash in some of your family's outside investments to raise capital for your venture -- you'll need to delay diversification until conditions stabilize.

Concentrate your energies instead on protecting your personal assets from business creditors. Creditors can range from a bank lender to somebody who wins a judgment against you in a lawsuit. (Lawsuits, by the way, are likely to increase in tough economic times.) Sanford J. Schlesinger, cochair of the family-owned-business practice of law firm Kaye Scholer LLP in New York City, urges owners to think about what he terms "asset segregation" to avoid potentially catastrophic personal exposure. "You want to make certain that personal assets are kept separate from business assets," he advises.

As a first step (one that you've probably already taken), incorporate your company to protect yourself from personal liability for business debts. Then follow these simple rules: Don't use your personal credit card for business purchases unless you file an expense report, and go through proper channels to get reimbursed. It's safest never to use a corporate card for personal transactions. Keep separate bank accounts for your company and your family.

"What you want to avoid is anything that might 'pierce the corporate veil," says Sandra E. Mayerson, leader of the national bankruptcy practice of law firm Holland & Knight LLP, who is based in New York City. "That is the term that lawyers use to describe a situation in which an owner has poked so many holes in his or her legal safeguards -- by failing to follow the rules that govern corporations -- that a judge decides it's fair to poke some even bigger holes."

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