Asset Protection for Business

Exploring the Costs, Risks, Contracting, Insurance, and Other Variables Associated With Asset Protection for a Business

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Exploring the Costs, Risks, Contracting, Insurance, and Other Variables Associated With Asset Protection for a Business

Introduction

Owning and operating a business is associated with risks and pitfalls, in addition to profits and/or losses. Investing and making profits or losses is not the sole responsibility of a business organization but it requisites protection of the investment from risks, claims, and lawsuits. With respect to a business organization, Stein (2017) argues that debt liabilities, mortgage onuses to vendors and third parties, claims for damages originating from products, employees, and /or professional liabilities, as well as consumer protection, are among the important risks, with which a business investment requires to deal. Handling these potential jeopardies inappropriately could lead to momentous loss of business assets together with personal properties. Understanding the potential risks and their mitigation strategies or how to avoid them provides individuals and organizations an opportunity to run their business ventures successfully.

Asset protection entails securing financial and physical properties of a business from damage that could be caused by fire, and natural calamities, or from consequent human crimes, such as theft, misappropriation and hacking (Magad & Amos, 2013). Other business valuables categorized as assets include strategic business and information data that is commercially sensitive and intangible properties, including intellectual properties and patents considering their vulnerability to diverse economic threats. The ultimate objective of an all-inclusive plan for asset protection is to avert or mitigate risks by cushioning business and personal assets from prerogatives of third parties, especially creditors and customers. Regrettably, the majority of small and medium enterprises (SMEs) are ignorant of various potential risks that pose a threat to their business ventures, and possible alternative avenues to protect their companies (Peters, 2014). Asset protection strategies are entwined to legal approaches that are enforced prior to litigation or a claim or prevent their occurrence. These legal approaches over various properties deter a potential claimant or assist in preventing the appropriation of individual or business assets even after a lawsuit judgment.

Different business entities employ asset protection strategies based on legal structures defining costs, risks, contracting, insurance, and other variables such as trusts and trustees, corporations and partnerships. The structure of these entities and variables vis-à-vis to asset protection accorded is dependent on the types of business and personal assets and the type of creditors that have the potential to pursue claims against them (Koh, Qian & Wang, 2014). On the outset, different strategies have been devised to provide asset protection through the use of documentation by outlining particular assets and potential risks, vulnerabilities, and threats against each business asset. Leveraging risks entails continuous record keeping of different types of business and personal assets, coupled with regular asset monitoring. Apt threat assessment of diverse forms of property assists in redefining the type of protection to seek and which good risk management practices to adopt. Studies highlight the use of a registry of intellectual property rights and eventual patenting, and compliance with various data protection legislation, particularly the recently enacted general data protection regulation (GDPR) as important protection strategies for non-tangible assets (Billings & Cedergren, 2015). Lastly, it is argued that the development of a contingency and business continuity plan is pertinent as the last result of all business ventures, which is primarily afforded through insurance.

While considering different strategies to offer business asset protection for both tangible and intangible assets, this study focuses on business risks, costs, contracting, and insurance among other variables in asset protection for a business. Specifically, the study seeks to elucidate best practices in the management of, and accounting for, assets in a business, as well as providing protection for intellectual property. The premise statement is built on the proposition that management of assets of a business is the most crucial endeavor of corporate with an aim of ensuring that they are safeguarded from third parties. As such, providing accountability to these properties via asset risk evaluations, legit contracting, seeking insurance covers, and the provision of comprehensive protection of these assets is pertinent to business success.

Problem Statement

Saksonova (2013) argues that asset management in a business is important for generating revenue, maximizing profits, and enhancing the value of a business venture while facilitating business continuity. Further, Kabanda, Tanner, and Kent (2018) assert that adept management strategies in business asset protection involve risk management as an integral component of the operational and strategic activities of any business organization. The philosophy of asset protection is embedded in business risk appetite with respect to calculated risk acceptance of business jeopardies (Magad & Amos, 2013). There is little or no literature explaining the risk management in relation to asset protection in a business. This study, therefore, seeks to determine the feasible calculation of risk acceptance for business assets, and identify the threshold for defining entities within an enterprise as business assets. Moreover, this research focuses on identifying the fraction of time and profits, as percentages, that require being dedicated to business asset protection.

Definitions of Terms

Asset Protection: It entails debtor-creditor law encompassing a set of legal approaches for safeguarding the wealth and assets of an individual or business organization against civil monetary judgments, mainly from litigations against it by creditors and spouses (Stein, 2017). The debtor-creditor law converts the assets into offshore asset protection trust that insulates the assets keeping them outside the precincts of local courts jurisdiction.

Business Asset: an entity that is valuable as a property or an equipment that is purchased by a business organization solely or primarily to benefit from or to generate income (Northcott, 2009). These assets can include short-term and long-term, current and non-current, tangible and intangible, and operating and capitalized entities.

Business Management: The activities associated with overseeing and supervising operations in a business organization (Drucker, 2006), including effective and efficient allocation of resources objectively, planning, controlling, directing and leading, motivating, monitoring, and organizing with the aim of realizing organizational goals.

Insurance: Risk management approach that is employed to hedge against potential risks of uncertain loss or contingency. Risk transfer mechanism are used by business organizations to warrant full or partial financial compensation following a loss or damage. Loss of property may be due to eventualities that are beyond the moderation of the insured business entity (Zweifel & Eisen, 2012). Insurance is mediated through a contract where the insurer indemnifies the insured against a predefined amount of loss for a specified period and eventuality following the payment of a premium fee.

Profit Maximization: It is the short-term and/or long-term process engaged by a business enterprise to determine the input, price and output levels to bring forth optimal profits with minimal operating expenses.

Risk Management: It involves forecasting, evaluation and analysis, assessment, control and mitigation, and avoidance, minimization or elimination of financial risks in a business organization. Business organizations use risk appetite, risk assumptions, risk avoidance, risk retention, and risk transfer among other strategies singularly or in combination in risk management of future business events (Hubbard, 2009).

Study Limitations

While this study focuses on business risks and strategies to mitigate and protect business assets, the amount of information available for particular business assets is a major limitation. Secondly, the variability of business types in different industries defines the need to use varying research approaches to capture apt results to make generalizable recommendations on strategies to offer asset protection for business enterprises.

Need for Asset Protection

Bianchi and Labory (2004) explained that business proprietors need to consider and understand the potential risks prone to their businesses, and how to safeguard them from the imminent threats. Financial and physical assets could be harmed by fire, flood and other kinds of calamities, including crimes, such as pecuniary embezzlement, and/or misappropriation. Operating a personal business is known to be predisposed to difficulties and risks. Achieving profit maximization is the ultimate goal of a business venture, but protecting the business assets against liability torts is equally significant. The most valuable assets that are vulnerable to a range of threats include intellectual property, which encompasses strategic business information that detail commercially sensitive data, and intangible assets (Mattila, 2015). The prerogatives for damages initiated by workers, product or expert liability and consumer-protection matters are risks that are dealt with. Inappropriate handling of these risks could, result in loss of cooperate and individual assets. Successful operation of a business entails the capacity of a proprietor to outline potential risks, and how to minimize and/or avoid them in the case of a law suit.

The precise approach of protecting an enterprise from liability claims is by separating personal assets from business liability either through documenting what the venture possesses against potential vulnerabilities. In order to reduce these risks from the business, there is a need to mount a scheme to log to document business assets, and keeping an inventory. Bianchi (2004) asserts that different types of business assets are according dissimilar weights in reference to risk reflection during a liability claim. Human assets comprising of employees that run day-to-day operations of an investment are engaged in planning and designing business strategies while accounting for and maintaining other corporate assets. Implementation of occupational, health and safety guidelines is pertinent to ensuring a safe working environment for employees and customers. Moreover, it is the obligation of an organization to issue insurance covers to insure employees in the event of accidents and work-related injuries are approaches important to reducing financial losses due to a successful lawsuit. Businesses develop models that redefine corporate risks and liabilities and identify competitive advantage structures, and core resources that make an investment venture to stand out from the competition (Moberly, 2014). Installation of cyber security controls, including passcodes helps in deterring unauthorized entry and access of business information. Passcodes are computer-guided strategies of mitigating cyber-attacks and threats to business intangible assets such as patents and intellectual property (Kalanje, 2015; Bianchi & Labory, 2004). There is a need to elaborate the potential risks to a business, associated costs of seeking (or not) asset protection, as well as feasible asset protection strategies that business organizations have implemented.

Running and operating a business venture is marred by risks and pitfalls. In addition to steering an investment into making profits, business operations also include implementing strategies that protect the organization from liability claims and lawsuits. There are various predisposed risks which include mortgage and debt obligations to vendors and other third parties, claims for harm, injury and damages originating from employees, professional and product liability torts, and requirements for consumer protection. Mishandling any of these risks and claims predisposes both business and personal assets to loss. The knowledge of what risks to anticipate and the mechanisms of minimizing or side-lining them outlays ample opportunity for business continuity and success.

The objective of developing and implementing a comprehensive asset protection disposition is to institute preventive measures to reduce optimally potential risks by isolating both business and personal assets from tort liabilities by creditors. Majority of SMEs are oblivious of the proneness of their businesses to potential risks, and likewise, are not knowledgeable of available alternatives to protect them. Strategies for asset protection in a business are built on legal foundations that are set up prior to the occurrence of a claim or lawsuit with the aim of deterring a prospective claimant from taking hold of the assets after a judicial process. Different strategies have been designed to build an asset protection plan, which includes independent legal entities such as corporations and companies, as well as trusts and partnerships. Others include registration of assets using alien identifications or for titles, and seeking contracts and insurance. The strategies to implement are dependent on the type of assets a business entity holds and the potential creditors that are prone to pursuing a claim against the business.

Lack (2002) elaborates on asset protection noting internal claims as a liability that is primarily limited to assets of a specific business corporation, such that tort liability does not extend to personal assets. A corporation dealing with real estate, for instance, may receive claims in the event a customer falls within their premise and accrues a physical injury, and decides to pursue a lawsuit. The physical harm is only regarded as a limited liability to the asset of the corporation. External claims, on the other hand, extend outside the precincts of limited liability into personal assets. For instance, a motor vehicle of the same company, driven neglectfully into a crowd of customers in their premise and causes injuries to lead to a corporate asset liability and into personal assets of the driver. Understanding differences in crimes allows a business organization to pursue appropriate asset protection plans to prevent seizure of business and personal assets.

Studies have established the different asset categories with Priestley (2017) identifying 24 asset types that a business organization needs protecting. Dangerous assets have been described as those harboring the highest risk of liability, including commercial property, rental real estate, business assets, particularly motor vehicles, and industrial tools and equipment. Conversely, safe assets define a moderate degree of claim liability. Owning bonds and stock, together with bank accounts potentiates relatively low risk (Lack, 2002). Separating the ownership of the two sets of assets to minimize their exposure to tort liability is very essential.

Potential Business Risks

Business asset protection is important considering the potential of a business enterprise to experience threats and/or liabilities from third parties. These intimidations and liabilities are business risks, which bring about possibilities that an investment will garner lower-than-anticipated profit margins or experience losses, altogether, as opposed to the realization of maximum profits (Miles, 2011). Asset protection, therefore, seeks to engage procedures that are geared towards preventing a business organization from threats and/or liabilities that are directed against the assets. According to Jolly (2003), business risks are diverse in nature and are influenced by input costs, sales volume, pricing per unit, competition, government regulations, and the general economic atmosphere. Essentially, business organizations with an elevated organization risk index require choosing a capital structure that presents with a minimal debt ratio to warrant the achievement of its financial obligations every time.

Essentially, risks in a business impair its capacity to deliver to its clientele and stakeholders returns that are adequate. In this case, the business organization is prone to risks such as exchange rate, systematic, region-specific, liquidity, financial and legal risk. Although there is an increasingly important need to minimize risks in a business, Kabanda, Tanner, and Kent (2018) purport that the strong link between business risk and profit maximization require risk management approaches to optimize the risk-reward ratio to levels that are within the precincts of business risk tolerance. It is a fact that in business, there is no financial reward without exposure to potential risks. In order to calculate business risks, financial analytics employ different margins, including contribution margin, financial leverage effect, operation leverage effect and total leverage effect although statistical approaches have been used to actuate potential business risks in an enterprise.

In a business venture, some risks are known although they are idealized as unknown. Integrating critical thinking and foresight, an investor is able to recognize unforeseen risks, and using apposite tools, know-how, insights, and protocols, the different variable associated with the risk are uncovered to aid in risk calculation, costs, strategies, and determination of management approaches (McNeil, Frey & Embrechts, 2015). Liquidity risk, for instance, is recognized with the determination of a potential incapacity of an investment to meet financial demands that are short-term in nature. In a study by Valverde, Solas, and Fernández (2016), liquidity risk was associated with the incapacity of a business venture to convert hard assets or other security into cash devoid of the loss of significant income or capital. A business organization may possess a valuable asset but due to market insufficiency or poor clientele viability, may not be in a position to trade its asset at market value. The immediate financial need for cash may force its sale at lower market values. For instance, consider a home in uptown worth $800,000 market value with no potential buyer. Such a hard asset has an obvious value but with consideration of market insufficiency and/or market conditions and time, an interested buyer lacks. With advances and improvements in market conditions and an increase in demand, the home may sell even at a higher price. Nonetheless, due to the dire need of liquidity for short-term finance, a business organization may not be in a position to wait further and is coerced to sell the asset in an illiquid market leading to a significant loss. A liquidity risk arises in holding the asset.

Understanding the systematic risk of an investment in a business organization is of primary import since it describes the broad-spectrum level of risk linked to different business layer in an enterprise, including the basic risks associated with fluctuations in the market, economic and political climate (Chan-Lau & Lu, 2006). Moreover, a business organization may be subject to a financial risk, which links the venture to an inability to manage its debts and financial leverage. As such, a business is faced with a risk of defaulting its debt repayment schedule possibly due to its insufficiency in generating revenue to meet all its operating expenses, or insufficient cash-flow that educe interest payment enough to finance debt-related obligations. Relatedly, Homaifar (2004) showed that an exchange rate risk is important to a business organization as it is a currency risk defining a financial risk that originates from fluctuations in the value of vase currency vis-à-vis foreign currencies of interest or holding assets and obligations of the business.

Reuvid (2010) described additional business risks classifying risks into financial and operational, and strategic and compliance risks. Natural risks are characterized by natural disasters while commercial risks include failures of business clients and primary suppliers. Studies have highlighted employee risk management as a form of a risk with reference to retaining a sufficient number of staff personnel, supporting employee safety, and provision of on-the-job training. Economic fluctuations of the foreign markets, from which a business imports or exports its products, and political instability, are potential risks that business owners require mitigating (Lam, 2017). The understanding health and safety risks against the employer and employees force business organizations to purchase suitable insurance cover in preparedness of tort liability.

Lastly, Whalley and Guzelian (2016) stress the importance of elucidating the legal risk associated with the operations of a business venture. In their book, Whalley and Guzelian (2016) determined that is a component of operational risk entailing threats to business operating environment. Thus, a redefinition of legal risk elaborates the legal liabilities and obligations of business operations. Studies have been conducted to identify and quantify the average operational expenses engaged in legal approaches toward asset protection. Primary and secondary data have been elaborated to assess the legal implications of asset protection in a business. Principally, profit maximization is the driving gear of an enterprise and since business assets identify with a business wealth, asset management and protection is indispensable. Equally, it has been established that misguided debt obligations, cybersecurity, claims for damages, and torts are potential risks leading to liquidation of a business (Judge & Brown, 2018). An all-inclusive risk management framework, therefore, encapsulating contracting, and insurance cover in a bid to accord protection to business assets is paramount to allow business personnel to optimize their energy on productive activities for sustainable operations and returns. Adept risk definition allows business managers to develop apt risk management strategies to protect assets against lawsuits, particularly through the use of title holding trusts, an application for insurance covers. In addition, a business organization may opt running their business operations as limited liability companies, and/or possessing liens to facilitate business asset protection from lawsuits and enhancement of profit maximization.

Costs Associated with Asset Protection

Proper management of individual or business assets entails identifying the value of the asset and how vulnerable it could be in case an individual or an organization is sued. It is the responsibility of the management to ensure that all assets are safely insured against all forms of litigations. All costs that are involved in insuring an asset should be timely met and the right measures on the safety of an asset put in place (Kaplan, Bailey, O'Halloran, Marcus & Rezek, 2015). Following legal approaches as asset protection strategies is associated with substantial costs. The cost of using offshore asset protection trusts has been shown to range between $20,000 and $50,000 in the course of setting them. Additionally, there are an associated annual administrative fee and asset management fees ranging between $2,000 and $5,000, and 1% of the total amount of assets under a trust, respectively (Mohamed, 2016). In the US, data suggest an increase in the number of small and medium enterprises opting asset protection. It was showed that SMEs expend between $3,000 and $150,000 in law court battles after receiving litigation claims. The market reality is that only a small number of SMEs care about asset protection as opposed to multinational corporations.

Studies conducting a cost-benefit analysis to evaluate the cost of protecting business assets against the amount spent on covering the liabilities established a higher index on the need to implement a comprehensive asset protection plan over covering the liabilities. Business organizations with financial strength opt pursuing a lawsuit since a victory from the litigation process is an add-on to their reputation (Evans, 2016). Equally, some forms of restraining orders present opportunities to business firms by pointing out loopholes exposed by the lawsuit while the firm focuses on sealing the identified gaps. Irrespective of the above-mentioned benefits, the cost of pursuing a lawsuit battle averages at $76,500, particularly for SMEs, while the cost of affording business assert protection is approximately $10,000. Hence, the asset protection plan cost costs outweigh the benefits of a potential lawsuit. In spite of the approach, a business organization may opt to pursue, following a legal battle and winning does not translate to pure benefits but is equally linked to detrimental effects on organizational reputation, a decrease in sales volume, and poor opportunities for creditworthiness.

Another study sample is in relation to costs associated with asset protection. Essentially, the goal of asset protection is to enumerate and evidence that asset protection cost is significantly lower that tort costs. In the US, the average cost of general liability assurance per year is $741 and a median price of $428 (Wallace & Webber, 2017). The primary security threat to SMEs in the region is cyber-crime and cyber security with an escalating 40% of cyber-attacks targeting SMEs characterized by less than 500 employees. As a result, more than 60% of businesses that have been attacked have exited the business world (Kaplan, Bailey, O'Halloran, Marcus & Rezek, 2015). On the other hand, even with the eminent cybersecurity risk targeting SME assets, 45% of SME owners expressed their confidence over cyber-attacks disregarding the potential risk considering that more than 50% of SMEs have not installed adequate cyber protection on their assets, which costs approximately $4,000 for a minimum security package (Kruse, Frederick, Jacobson & Monticone, 2017).

Judge et al. (2018) described a tort is an unlawful act that can be translated into a legal liability against the offending party. Business organizations face a trespass charge on chattels when they exploit properties of landowners, such as buildings, illegally without meeting the obligations stipulated in the contract document. Estate agents may seek legal avenues when a business entity keeps using office space irrespective of lease lapse. Some firms disregard occupation, health and safety guidelines and may fail to institute adequate safety measures for their employees. Exposure of employees and/or customers to workplace harm and injuries may lead to a lawsuit against the firm. Equally, a disregard on the part of a business organization to fail to warn their customers of imminent injurious materials that could potentially cause bodily or psychological harm when handling their products or when entering their premises is a call for a lawsuit. In all cases, litigations are associated with large financial output in the part of the defending firm, as well as a reputational loss for the entity (Billings et al., 2015). Northcott (2009) established that SMEs in the United States market only account for 81% of tort costs. Businesses suffering tort cost spend a significant amount of money in civil lawsuits since an applicant claims business losses and financial harm, which result in legal liability to the business.

Among the top liability claims directed against SMEs include liability torts, property torts, infringement torts, dignitary torts, and negligence torts. Evidently, SMEs do not consider their assets worth protecting and only a few small businesses have taken a role in investing in risk management processes. Stephenson (2000) outlines different intentional torts to property, which describe illegalities that are associated with trespass to land and chattels, nuisance and obstruction, and conversion. SMEs are largely affected by tort liability because of the miniature structure in their management. For instance, a lawsuit against a sole proprietorship by a creditor or a customer means that the business assets together with personal assets, property, and assets are prone to litigation risk, a characteristic of SMEs (Stephenson, 2000). Conversely, the structure of limited liability companies (LLC) is such that it insulates personal assets from litigation judgments. In LLC, the business entity is liable of its debts among other liabilities protecting personal assets through a corporate veil. Goldberg, Sebok and Zipursky (2004) associate dignitary torts to increased costs of lawsuits against SMEs, and describe it as litigation as a consequence of indignation of a creditor, employee or customer. Similarly, infringement torts highly associate with violations of intellectual property laws. Many organizations incur additional negligence costs which are largely as a result of failure to observe regulatory stipulations from legal agreements, contracts and government legislation. As such, different strategies have been developed to guide business organizations on how to protect their assets from judicial judgments that are a threat to them.

Asset Protection Strategies

i. Contracting

When an organization or an individual wishes to contract another company for the purposes of safeguarding their assets from being lost to any liability, the assets are safeguarded and minimal loses in case of any will arise. The terms that are elaborated in the contract, deter the lawyers or any other third parties from acquiring assets that belong to the defendant (Solomon & Saret, 2009). When the contractors conduct their businesses efficiently, there are low chances of losing property because all forms of assets will be well safeguarded without being involved in any risks. In order to achieve effective insulation from liability claims on business and personal assets, the management is required to ensure that all contracts are drafted and signed in compliance with postulated policies entailed in leasing an asset to sidestep future claims. Right type of insurance covers for business and various assets should be considered to ensure that in case of a law suit all assets are rightfully covered and there will be no possibilities of losing property under all circumstances. Willis (2018) depicts that with an adequate and effective identification of risks that may arise and lead to loss of property is on importance. When a risk is identified, effective measures are put into place to ensure that the involved assets are secured to an extent that law will not dispose of any assets to settle liabilities. To avoid any risks at the workplace, employees have an obligation of wearing protective clothes that minimize the chances of accidents at the workplace which may at times lead to suing of the company owner. Adherence to different policy requirements in the workplace as stipulated in contracts is pertinent to the elimination of infringement torts and a reduction in negligence costs. Visitors visiting a firm should also be forewarned of any risky areas that they should not go to for the purposes of avoiding injuries, which may result in a lawsuit. Equally, there is a need to have warning directives on products alerting customers and users on how to exploit such products. In this regard, the management seals all loopholes that lead to liability claims by investing in a comprehensive contracting documentation as an effective risk management plan.

In practice, it is difficult to successfully avoid all business risks that predispose assets to liability claims unless the understanding of contract law is perfect. Irrespective of proper planning, it is impossible to circumvent personal liabilities that are unlimited from business debts that are not credited accordingly (Solomon & Saret, 2009). There exist explicit exceptions in both contract and tort liabilities, such that a business enterprise is able to avoid the exceptions successfully. Entering a contract as a business owner or manager requires providing the acting agent with express authority. This permission is granted by the principal through a written form for viability in legal situations, or through the use of express written authority from bylaws of a business organization.