Starting your own business can be exciting, especially if it’s your passion and dream. But know that it entails challenges that can put your assets at risk. You need to be careful with financial management, monitor operations and employee performance, and ensure that you’re compliant with regulations, among other things.
Running a business is tricky, so much so that you could needlessly put your personal assets at stake if you run into trouble. When that happens, it will be like rubbing salt in a wound. So you must draw a clear line between your business and personal assets.
Fortunately, the following measures will help you achieve that and protect your personal assets.
- Choose The Appropriate Structure
If you’re starting a business, it could be a wise decision to choose a legal structure that will keep your personal assets separate from your business assets. Each business structure has its pros and cons. For instance, in a partnership or sole proprietorship, you may benefit from its simplified and more straightforward framework. However, you can still be personally liable for your company’s legal and financial troubles.
On the other hand, limited liability companies (LLCs) and corporations allow entrepreneurs to keep their personal assets safe. So, as a shareholder, you can be only held legally and financially liable up to the amount you’ve invested in the company. However, you can still be held personally responsible for allowing or committing statutorily prohibited acts on behalf of the business, such as embezzlement and murder.
- Keep Personal and Business Affairs Separate
Remember that the paperwork won’t be enough to protect you legally. Filing for an Articles of Organization in your state is not enough. It’s essential to create a clear line between your business and your personal affairs, especially finances.
For instance, if you’re looking into how to start an LLC in Texas, you need to set up a checking account in the company’s legal business name. You will have to keep the minutes of your annual meeting, use the business name on all business documents, and pay the required annual fees and update documents as the state requires. You should also never falsify your books. A business audit can reveal any misuse of finances, any failure to comply with requirements, incomplete and inaccurate records, and cases of commingling of funds. The court will intervene if you’re found guilty of misconduct and pierce the corporate veil.
Taking these measures will serve as evidence that will protect you from any personal liability should legal issues ensue. They will prove that you complied with the state laws and business policies.
- Buy Business Insurance
Business owners must have a comprehensive general liability and property insurance policy. A comprehensive general liability policy covers payment for customer injuries, property damages, and compensatory damages. A property insurance policy provides coverage for damages in the establishment and all the property in it.
Business insurance is crucial as it serves as a shield against speculative claims that can put personal assets at risk. Some types of insurance are errors-and-omissions insurance and malpractice or professional liability insurance.
When choosing a policy, be careful not to over- or under-insure. Over-insuring will unnecessarily hurt your cash flow, while under-insuring can leave you needlessly covering for losses from your personal pockets. Talk to an insurance provider representative to find the best business insurance for your type of business.
- Maintain Contracts And Procedures
In an LLC or a corporation, members or shareholders are not held personally responsible for the company’s actions during legal troubles. In other words, their liability does not go beyond the value of their shares. But then again, creditors can still pierce the corporate veil if they are proven to engage in fraudulent and negligent acts, as mentioned earlier.
Make sure that every transaction is documented. Have good lease agreements for rentals, subcontractor agreements in writing, and contracts for each project. Avoid email contracts, as they have less legal value. Emails must have the necessary elements to make them legally binding.
Also, hire people legally and legitimately. You must have bonded, licensed, and insured professionals, such as tax advisors, asset protection specialists, and maintenance specialists. These professionals have the training and are certified to prevent property or asset loss.
In Conclusion
You can protect your assets in a business by choosing a structure that protects your personal assets, buying business insurance to avoid paying out of pocket, separating financial capital and industrial capital to prevent potential conflict of interest, and drawing contracts and agreements in each business dealing. These measures will help you protect your assets. They will serve as evidence of compliance in times of legal trouble.
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