Business owners sometimes unknowingly put their personal assets at risk by not taking important precautions. I see that happen most often with new entrepreneurs who either don’t understand the gravity of the risks or don’t realize what they need to do to mitigate them.
How can you protect what you personally own in the event your business faces legal issues or debt?
While there’s no sure-fire way to prevent the unthinkable from happening, you can help keep your personal assets out of the danger zone with the below suggestions:
Form an LLC or incorporate your business.
When you form an LLC or incorporate, you establish a business entity that’s separate from you and any other owners. Generally, only the business’s bank account and other assets, not the owners’/shareholders’ personal assets, are at risk if an LLC or corporation can’t pay its debts to creditors. Likewise, your personal assets are protected legally against suits brought from the wrongdoing of associates. However, loans that you personally guarantee and wrongdoing by you could still put your personal assets at risk.
Keep your business and personal finances separate.
Even if you’re operating your business as a sole proprietorship, you’re wise to avoid comingling your business and personal monies. Mixing funds can be confusing and make tax authorities (like the IRS) suspicious. You don’t need that hassle! If your business is registered as an LLC or corporation, you’re required to maintain separation between your personal and business finances. So, keep separate checking, savings, and credit card accounts, etc. If you don’t, your business could fall out of good standing with the state and you’ll put your personal liability protection in jeopardy.
Keep your business compliant.
As an LLC or corporation, you’ll have various state and local regulations to comply with. Besides filing taxes and paying incorporation fees when they’re due, you’ll have other compliance obligations, as well. They might include forming a board of directors, holding annual meetings, recording minutes, and maintaining certain licenses and permits.
“Piercing the corporate veil” by not following the rules could result in you being held personally liable for business debts or legal issues. Make sure you understand what requirements apply to your business and have a plan for following through on them. If you need assistance to stay on top of things, consider enlisting the help of an online business filing service.
Get business insurance.
Getting an insurance policy can also give you some peace of mind. Different types of businesses have varied needs. An accounting firm owner and a physician with a private practice will require different coverage, so it’s important to talk with an insurance agent who has experience with insurance for your particular type of business and industry. Perhaps a Business Owner’s Policy (BOP) that bundles liability and property insurance into a single policy might be what will serve you best, or you might need other types of insurance, such as Data Breach Coverage.
While there is no completely bulletproof way to protect your personal assets all of the time, the suggestions above can minimize your risks. To ensure you’re protecting yourself and your business as best you can, I recommend talking with your accountant and attorney to discuss what protections you should put in place. Starting and building a business is hard work, don’t jeopardize your success by ignoring unlikely but possible legal and financial issues.