Many Americans dream of working for themselves one day — and you might be one of them. Whether it's running your own restaurant, interior design company or law firm, being your own boss can be a rewarding experience. However, it can also come with certain risks.
There are nearly 29 million small businesses in the country, according to the Small Business Administration, which means many people have realized their entrepreneurship dreams. But what happens after you do? How can you protect what you've built?
Asset protection strategies could be critical if you work for yourself, especially if you own a small business. Here's how you might be able to reduce your liability and help make sure your assets are protected should your business face a lawsuit or claim.
1. Choose the Right Business Structure
When you first launch your business, you may operate it as a sole proprietorship without any formal legal structure. But if someone sues you or if an employee or independent contractor gets injured while working for you, that lack of legal structure could be costly. To help protect your assets, you might consider formalizing your business and incorporating it.
Fortunately, there are several options for doing this:
- Limited liability corporation (LLC): The Internal Revenue Service (IRS) considers an LLC a pass-through entity, which means the business's profits are reflected on the owner or LLC members' tax returns. Incorporating your business into an LLC could allow you to form a separate legal entity that may protect you from personal liability if someone sues your business.
- C corporation: This business structure also separates your personal and business assets, but it has more tax advantages than an LLC. A C corporation also involves shareholders and a board of directors, but it often comes with more regulation, taxes and fees.
- S corporation: You could also get liability protection with an S corporation, but unlike a C corporation, profits pass through to the owner or shareholders and are only taxed once.
- General partnership: This business structure involves an agreement between at least two people. A general partnership provides less asset protection than the other business structures because each owner has personal liability for all the business's debts.
Other business structures include trusts, limited partnerships and family limited partnerships. Before you decide to incorporate, it might be helpful to talk to a lawyer or an accountant about which structure is right for your business and would provide the most protection.
2. Separate Business & Personal
Mixing your personal assets with your business assets could be a recipe for trouble. Even if you haven't yet formalized your business structure, you could at least consider using separate business and personal bank accounts and credit cards (this is a requirement for LLCs and other corporations).
Try to avoid charging personal items on your business credit card or withdrawing money from your business account to pay for personal items (and vice versa). Consider depositing all revenue from your company into your business bank account and paying yourself a salary out of these funds. Following this advice could help reduce your liability and make it easier to manage your business finances.
3. Don't Forget About Insurance
If you'd consider it risky to go without health insurance or life insurance, you might consider how it could be just as dangerous to leave your business uninsured. Incorporation provides some liability protection, but it doesn't cover everything.
A liability insurance policy could help protect your personal and business assets in the event you lose a lawsuit and must pay a hefty claim. The type of insurance you need could vary depending on your industry. (For example, doctors often carry malpractice coverage.) But you could check with your current insurance carrier to see if it offers the coverage you need, or perhaps speak with a financial representative to find the best coverage at the best price.
4. Compliance Counts Too
LLCs and corporations are subject to several rules and compliance measures, including paying business taxes and state and local fees, filing specific documents and maintaining accurate and thorough business records. If you don't comply with these requirements, you could be held personally liable. For example, if you haven't paid business taxes, you could become personally responsible for any tax liens against the business.
If you can't manage all these responsibilities yourself, you might consider hiring a bookkeeper or accountant to help your business stay compliant — it'll likely be money well spent.
5. Know the Law
While it's important to understand compliance requirements, another asset protection strategy is knowing which state laws could protect you from creditors. Federal law may help protect certain retirement assets if your business is liable, so a qualified retirement plan or individual retirement account (IRA) would be protected in most cases.
Asset protection strategies could be very useful for business owners. If you own a business, you might seriously consider taking steps to shield it — and yourself — from liability. The first and ideal option might be to incorporate your business and get insurance. Keeping your business and personal assets separate could also protect you from creditors or a huge financial penalty.
Working for yourself comes with a level of satisfaction that's nearly indescribable for most business owners, but doing everything necessary to protect your assets may also reduce your risk and help ensure that the reality of business ownership is similar to what you dreamed it would be.