Protecting Your Personal Finances
Keep a good separation between business and personal to make sure you'll be OK if your business isn't.
Unfortunately, many businesses hit bumps along the way--and some just flat-out fail. So it's critical that business owners protect their personal assets in case their own businesses don't have storybook endings. Make sure you have these pieces in place to keep your individual assets separate from your business dealings.
Organize. Establish the business as a corporation or limited liability company rather than operate as a partnership or sole proprietorship, says Asher Rubinstein, a New York City asset protection attorney. "However, don't assume setting up a separate entity automatically protects you," he says. If you're using the business as your personal piggy bank--paying for groceries out of the business checking account, for example--someone who sues your business may be able to establish that you and your business are one and the same, and that could make things of value like your home and your investments fair game. Also, respect the formality of the entity you establish by keeping proper books and, in the case of corporations, holding annual meetings.
Share. If possible, add a second, non-spouse owner to an LLC. Single member LLCs don't provide as much protection as they used to because case law has made it easier to prove an LLC and individual are one and the same. Having a minority owner who holds even 2 percent of the company allows the business owner to make a stronger case for preserving the entity in lawsuits.
Insure. Attorney Lance D. Churchill, who teaches personal asset protection through his firm, Frontline Education in Boise, Idaho, says proper insurance is critical. "You'll need a basic liability business insurance policy, and may need other specialized types of insurance, depending on your industry," he says. Industry associations and an insurance broker familiar with the type of business you own can help you determine appropriate coverage levels that protect you without leaving you overinsured.
Offload. "John D. Rockefeller had a famous quote: ‘Own nothing, but control everything,' " Churchill says. He advises his clients and students to do the same by leasing large assets, like vehicles and equipment, and transferring ownership stakes to trusts or limited partnerships for high-value businesses. The fewer assets the business owns outright, he says, the fewer that are subject to seizure.