Political pundits may not agree on much but (unfortunately, maybe) most admit that our economy is in (and has been on) a downturn.  So what is a small business owner to do?  The majority of us are used to the ebb and flow of the training market but we may be in for even tougher times ahead. 

The general rule of thumb for small businesses is to collect personal assets outside your company as soon as your cash flow is good enough to support a livable owner’s compensation.  But in lean times, that can be a very difficult accomplishment.

In these cases, the best thing you can do is protect your personal assets from business creditors.  Simply put, you do that by keeping them separate.  Easier said than done sometimes, but here are some tips on how to keep it safe.

•    If you haven’t already, incorporate your company.  That will protect you from personal liability for all of your business debts.
•    Don’t use your personal credit cards for business purposes unless you file an expense report and reimburse yourself through your business each time you do so.
•    Conversely, do not use your corporate cards for personal use.  Ever.  Period.
•    Keep separate bank accounts for the company and for your family.
•    No matter how small your company, don’t blow off formal procedures like annual meetings.  Even if its by telephone or chat room, keep board minutes and itemize all the issues that were discussed.
•    Any transactions between you and your company that are in any way beyond the norm need a big paper trail.  For example if give yourself a bonus or float yourself a loan, have the board vote on it and document the transaction.
•    If your marriage is secure enough, you might want to consider shifting all your family’s personal assets (houses, personal vehicles) to your spouse (assuming that your spouse is NOT involved in your business).  If you do this make sure your spouse does not become involved in your business in any way, such as signing a guarantee on a business loan, which can put your spouses assets at risk to creditors.  Especially if you use the same bank for personal and business: a business loan default can automatically “cross-default” to your home loan if these holdings are not kept completely separate.

If things ever get really desperate and your business is considering filing for bankruptcy, be sure to investigate the protection-from-creditors loopholes in many state laws.  Many states allow you to shelter some or all of the value of your home under the “homestead” laws, but the amount of the exemption changes from state to state.  And there is currently legislation being considered in D.C. that will set a national limit of 125,000 on homestead exemptions.  Many states protect life insurance policies and annuities from creditors as well, so that is another avenue worth checking out.  (As an aside note, you can also put college money in insurance polices instead of savings accounts and the money does not have to be reported on financial aid forms when you are applying for college monies either as a student or parent of a student.)

No matter what strategies you invoke, do involve your business attorney and accountant.  They will have advice and suggestions about your downside planning and will appreciate being in the loop now if your financial ground gets shaky in the future.