Contributed by Dymond • Reagor • Colville, LLP, a Rocky Mountain Chapter IEC Industry Partner


It takes long hours and hard work to create a successful business or a comfortable nest egg.  What has
taken years to build, however, can be threatened by one bad year or, even worse, one wrong decision.
If your debts become too numerous or too large, creditors may begin searching for your assets like
sharks at a feeding frenzy.   Shielding your assets in those circumstances can only be achieved with
careful advance planning.  This article discusses three elements that you should consider in crafting an
asset protection game plan: (1) business planning; (2) estate planning; and (3) insurance protection.

1. Business Planning

From a business planning perspective, one of the essentials for an asset protection plan is the creation
of a separate entity to operate the business.  There are many business forms to choose from including
corporations, limited liability companies and limited partnership associations.  Each of these entities is
designed to shield the shareholder, member or manager from personal liability for the debts and other
obligations the business may incur.  In contrast, one who operates his or her business merely as a sole
proprietorship, general partnership or joint venture, will be held personally liable  for the debts and
obligations of the business.

Another component of an asset protection plan requires deciding who will own the “business” related
assets.   Typically,  these  assets  include  the  office  building,  real  estate,  automobiles,  tools,  office
equipment and even office furniture.  You may be able to shield these assets from the reach of business
creditors if the  assets are  owned  by  others  and  simply leased to the  business.   The  “others”  could
include the individual shareholders or even a separate entity created by the shareholders for the sole
purpose of owning and leasing the particular asset.

One should also consider whether the nature of the business lends itself to being separated into distinct
operating  units.   For  example,  residential  work  can  be  performed  by  one  business  entity  while
commercial work is performed by another.   Additionally, a separate business entity may be  formed
solely for the purpose of performing work on a specific project.  Segregating the work in this manner
may help to “contain” or minimize the potential negative impact of a risky business venture.

2. Estate Planning

Even the best business planning  for asset protection cannot provide insulation  from creditors in all
circumstances.  You can still be personally liable for documents that have been signed in an individual
capacity, such as promissory notes, indemnity agreements or personal guarantees.   Personal liability
may  also  arise  from  claims that  come  from  your  own  negligent  conduct,  such  as  an  auto  accident
caused by your failure to use a turn signal.  For this reason, estate planning can play a critical role in
crafting an overall asset protection plan.

One  of the  goals  of  estate  planning is to  protect  your  personal  assets  from the  reach  of  creditors.
Assets in this context typically include real estate, stocks, bonds or cash.   Shielding personal assets
from creditors is primarily achieved by transferring ownership of the assets to another.  They can be
transferred to a spouse or a child.  The assets can also be transferred to an irrevocable trust account or
placed into a Family Limited Partnership.  The latter can provide excellent asset protection, while at
the same time providing a method for transferring ownership of a business to one’s children.

3. Insurance Protection

Insurance can serve as another component of an overall asset protection plan.  There are many types of
insurance  policies,  each  covering  specific  events  or liabilities.   For  example, there is  commercial
general liability insurance, personal auto liability insurance, homeowner’s insurance and errors and
omissions  coverage.   There  are  at  least  two  factors  to  having  effective  insurance  protection:  (1)
sufficient coverage; and (2) sufficient amount.  Without having insurance policies to cover the most
likely risks that you and your business face, or having the policies for amounts to cover the most likely
liabilities  that  would  be  sustained,  the  insurance  coverage  you  obtain  may  not  provide  sufficient
protection against potential claims or losses.

4. The Importance of Advance Planning

The importance of timely and properly undertaking asset protection planning can not be emphasized
enough.   The  time  to  prepare  and  implement  a  plan  is  b e f o r e the  debt,  liability  or  claim  arises.
Insurance policies typically do not cover pre-existing claims, and a transfer of assets after the fact is
often  rendered  void  as  an  attempt to  defraud  creditors.   One must  also  properly  execute the  asset
protection plan.   Failing to do so can result in lack of control over or loss of the asset, unwanted tax
consequences, or even the loss of protection from creditors that was sought by creating the plan.

This  article  has  given  you  a  general  and  over-simplified  review  of  some  asset  protection  planning
considerations.  What would be appropriate for any particular person or business, however, depends on
the particular situation of each individual or business entity.  Always consult with a qualified attorney
concerning asset protection, and address these concerns before substantial liabilities are incurred, or
costly claims arise.

Douglas Colville is an attorney with the law firm of Dymond Reagor Colville, LLP.  He is also a
member of the IEC Contractor On-The-Move Committe