When you start your own business you are also taking on some amount of risk. Taking on business risk doesn’t have to mean putting your personal wealth in jeopardy. In this article, we’re going to discuss ways to help you eliminate risk and protect your personal wealth.
Selecting the Right Entity to Fit Your Needs
Setting up your business should start with selecting what type of entity you would like to do business as. Different types of entities are associated with different levels of exposure. Although there are many different options, we’re going to compare the level of risk associated with the three most common types of entities for small businesses.
- Sole Proprietorship: The simplest business entities to create but has the least amount of asset protection along with it. All liability falls directly onto the sole proprietor.
- Limited Liability Company (LLC): Less exposure to personal risk than a sole proprietorship (all liability falls onto the assets of the company not the owner), but more complex to establish.
- S Corporation (S Corp): More protection from personal risk (all liability falls onto the company, not the stockholders), but even more complex to establish and operate.
When it comes to reducing potential risk, an S Corp or LLC may be the best entity option to protect your personal wealth - liability and expenses are completely separate from your personal assets, only extending to the assets of the company itself, meaning you can only lose as much as you have invested into the entity.
For more information on selecting a type of entity read our article: Getting Legal Assistance in Choosing the Best Business Entity for Your Business.
Separate Personal Expenses from Work Expenses
Reducing risk is all about planning for the unknown. Although you never know what might come your way, including a lawsuit or an audit from the IRS, it’s important to be prepared. For those potential threats, keeping your personal expenses separate from your work expenses is especially important. Besides that, it’s just a good business practice and helps protect your personal credit.
Opening a business banking account separate from your personal account should be the first step in dividing the two expenses. In addition, keeping clear documentation of your records and meeting minutes is vital. Having a process in place to review these annually or even quarterly will ensure that you’re prepared if the need arises that you have to present any and all of your records.
Insurance and Asset Protection
One of the best ways to protect yourself is having proper insurance coverage for both you and your business. Being properly protected can safeguard you from numerous situations including injury, disability, theft, and/or property damage.
In addition to protecting your personal wealth, another noteworthy topic is that of identity theft. Identity theft is an ever-increasing issue that can be detrimental financially and otherwise to both you and your business.
Don’t Wait, Protect Your Personal Wealth from Business Risk Today
Choosing the correct entity, separating your expenses, and purchasing the proper coverage can greatly increase the amount of protection your personal wealth will have against potential business risk.
To learn more about shielding your personal wealth, insurance options, or asset protection strategies, contact us today for a complimentary 30-minute consultation.
For more resources on incorporating, review our related articles:
- 10 Signs You’re Ready to Incorporate
- A Solution to Independent Contractors Biggest Dilemma: To Incorporate or Not?
- Incorporating 101 – Everything You Need to Know Before Incorporating
- Should an Independent Contractor Incorporate: The Value, Money, and Legal Protection of Incorporating in California
--