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Starting a business can expose you to all sorts of financial and legal risks. Here are 4 tips to avoid them
Being a business owner comes with many risks, particularly for a startup. You are throwing a lot of time and effort into a venture that may or may not be financially viable, and you’re probably willing to put it all on the line for your new business.
But before you accidentally risk your entire financial future for the sake of a business venture, consider taking steps to protect your financial wealth. Business is a risky game, and your business could easily burn through your entire fortune if you try to connect the two.
Rather than allowing a single business the chance to wipe out your savings, take precautionary steps to protect your wealth in the event that you are involved in a business that you want to see succeed. Here are four tips to protect yourself and your finances from any business risks.
1. Keep your personal finances separate
Be very careful to avoid commingling assets between your business and your personal finances. Although it can be tempting to treat your two financial accounts as connected and dip into one or the other as necessary, by combining the two pots, you risk getting unwanted attention from the IRS. They will be perfectly willing to use such actions to justify seeing personal assets in the case of bankruptcy for your business.
Don’t put your personal wealth at risk. Take care to maintain and accurately log separate checkbooks in your personal finances and your business expenses, and carefully document how you are separating the two in order to reference it in the future should you need to. In order to maintain successful and thorough proof that your finances are kept separate, you should perform an annual review of all your documents to ensure paperwork and minutes are all in order and clearly identify the business as financially separate from your own assets. This will protect you from co-mingling assets and will also serve as reference information to prove business expense deductions on your tax reports.
2. Look into insurance protection
Although there are some insurance offers that are mostly scams you want to avoid, you will want to look at some form of insurance for asset protection both for your business and your personal wealth. An insurance agent will be able to guide you through the forms of insurance you may need to protect yourself, but these could be anything from rental insurance to an insurance on your business specifically.
Insurance will protect your business in the long term because it alleviates the personal risk and responsibilities you have to pay for. Insurance can shell out for financial damages in liability cases, protecting both your personal assets and the business assets. LLC insurance in particular can protect your business in the event that you are sued for defrauding, failing to anticipate an issue or negligence.
3. Make your business an entity
Avoid setting your business up as a sole proprietorship. This arrangement, although convenient on the surface, puts your entire personal wealth at risk of being seized should anything go legally wrong with your business. Instead, arrange to place your business in some sort of entity like a limited liability company. This will protect you as an individual partner in the business while keeping the focus on the business itself for any wrong doings, expenses or liabilities. This directs attention away from yourself and your assets, offering a greater level of separation in order to protect your finances.
It’s important to recognize that although forming an LLC is a critical step in protecting your financial assets from your business, it cannot be the final step. But it does allow business owners to risk losing only the money they willingly invested into an LLC in the case of a lawsuit. However, you may still be liable for some expenses like unpaid salary taxes or personally guaranteed debts.
4. Avoid negligence in your business
Negligence and fraudulent charges can have a devastating effect on your business. Although you can take steps to financially protect yourself in the case that such an accusation is levied against you or your business, the best way to financially protect yourself is to document and prove that you are not negligent. Develop and maintain procedures to anticipate problems and avoid getting sued, and be sure to document them extensively and accurately in order to reference them in the future.
Starting a business can expose you to all sorts of financial and legal risks. If something you failed to anticipate goes wrong, you could be on the hook for millions in damages depending on the severity of the incident; and in the case of many small businesses, that could mean the court taps into your personal finances in order to hold you responsible. By taking steps to keep your personal and business finances separate, you can avoid having your personal finances invaded or affected by your business expenses and maintain total personal protection over your assets.
Jeremiah is an industry analyst, speaker and entrepreneur who helps corporations connect with customers using emerging web technologies. He has more recently focused his career on disruptive technology, helping create multiple crowd funded projects utilizing peer-to-peer networks and speaking at many conferences and events addressing this topic