Starting your own business can be exciting and requires a lot of hard work—but that doesn't mean you should be putting your personal assets on the line. Starting a business is a risky proposition to begin with and paying for business expenses such like inventory, equipment, utilities and personnel from personal accounts can put your personal finances at in jeopardy if the business fails or is sued.
With that in mind, here are a few ways to provide asset protection and separate your business finances from your personal accounts:
- Create a separate legal entity for your business. The first and most important step towards making sure you are personally financially protected is creating a legally separate entity for your business. But what kind of entity should you be forming? This will be determined by the needs of your business. While many small business owners opt for a sole proprietorship or a "doing-business-as" (DBA) designation, these do not afford you personal protection from any company debts, judgments and lawsuits. Forming a corporation or a limited liability company (LLC) offers varying levels of liability protection for owners and employees as well as a clear demarcation between business and personal assets in case creditors attempt to seize them. Limited liability partnerships (LLP) offer similar protects to LLC but are only available to certain kinds of businesses involving multiple partners, like law or accounting firms.
- Keep business and personal finances separate. Once you have set up a legally distinct entity comes the next step: setting up a separate business account. Nearly anything you hold financially as a a private citizen can be reproduced as a business—from checking accounts to credit. The key is to never draw from your business accounts to pay for personal expenses, or vise-versa. This is known legally as "commingling assets," which can make you a target of an IRS audit or creditors.
- Document all income and expenditures. This may seem obvious, but diligence about keeping careful track of any credits or expenses that your business incurs (and where the money came from/went to) will provide you protection if you find yourself under scrutiny. Furthermore, make sure any amount of money you put into the business—often an inevitability for small business owners—is thoroughly documented. The same goes for deductions you make on your taxes for business expenses; always be able to provide
- Get the proper insurance. Liability and other financial disasters can be one of the biggest expenses a business faces. Different policies can cover different aspects of your business—you may end with one provider covering your business and another covering the building you operate out of.
- Avoid personal guarantees. When seeking business funding, some commercial lenders may ask for a personal guarantee, meaning the fulfillment of a loan or other financial agreement would fall on you if the business fails. These types of agreements may be unavoidable in some contexts (when dealing with the The Small Business Administration (SBA) for example) but the key is limiting the scope of three agreements wherever possible. Commit only a specific list of personal items as collateral versus making a more generalized personal guarantee.
Even with these strategies, the best thing you can do to keep your personal assets safe is to consult with an experienced and knowledgeable business attorney. At The Law Offices of Donald W. Hudspeth, P.C., we have helped countless people with the formation of new businesses, incorporating, and are experts ensuring your assets are protected. Give us a call today to get started.