Starting a new business is exciting, but it’s also risky. You may have already considered certain risks, such as what will happen if you don’t attract customers right away, but other risks can be problematic as well.
One of the biggest issues a lot of new business owners don’t take into consideration is asset protection.
Legal and business advisory firm Anderson Advisors highlighted what can happen when a small business isn’t structured properly to protect the owner. One example was a dry cleaner who was sued for more than $50 million for allegedly losing a pair of pants belonging to a customer.
It’s essential to ensure you’re protected from liabilities you might not ever have thought of, as well as frivolous lawsuits.
The Options
First and foremost, you need to look at the different protection plans that are available to you as a small business owner. The goal is to separate your personal and business assets and protect your personal assets even if someone is coming after your business.
Options include Limited Partnerships and more commonly Limited Liability Companies, also called LLCs. When someone separates business and personal assets, it not only protects these personal assets against business lawsuits and liabilities, but it can keep them out of the reach of creditors.
Multiple Businesses
If you’re operating multiple businesses, or if you have different areas of a single business that operate in different ways, you might want to layer your legal structures.
One example that’s frequently given is owning a property where in one part you operate a retail store, and the other part you rent it to a tenant. You may want to set up separate legal entities for each of these, for more protection. This can protect each aspect of your business, as well as ensuring your personal assets are also separate.
Business Insurance
Along with setting up the correct entities, you’ll want to ensure you have the right business insurance policy or policies as well.
Every entity you set up should have a separate business insurance policy, creating even more robust and layered protection.
There are certain scenarios where even if your business is an LLC, you could be forced to pay from your own pocket, and business insurance can shield you from many of these situations.
The minimum a new business should have is called a Business Owner’s Policy, protecting against general liabilities.
Other Financial Issues
Sometimes even if a new business owner protects their assets by setting up an LLC, they may muddy the waters by doing certain things in their own name. Everything needs to be fully separate.
As a new business owner, you should make sure you have a business bank account that’s in the name of your new company, as well as a business credit card if necessary. You should set up all agreements and leases in the name of your company, and not your personal name.
Also, even if you have an LLC and you sign a personal guarantee for a commercial lease, as an example, you may be on the hook if you break the lease. Keep it all separate whenever possible, and sign in the name of your business, even if it seems like putting your name on something could be easier at the time.
