Protecting Your Personal Assets
A smart entrepreneur protects their personal assets when they begin a new business venture. There are three key factors you need to know to make sure you are not personally liable for potential failures or lawsuits against the company.
1. Know Your Protections
The first of these is to know your protections when incorporating. When you incorporate you create a separate legal entity from yourself. Whether you choose to form a Corporation or an the LLC, the state of Florida offers equal rights of separation to you as the owner. This can be a point of confusion. In the state of Florida Limited Liability Corporations have become the most popular form of incorporation among small business owners. This is because they allow the same legal separations as a corporation without the need for as strict of a corporate structure. However, because of this more lenient business structure LLC’s have failed to protect the business owner as thoroughly in court as their corporation counterparts. Or in other words, it all depends upon the strength of your “corporate veil.”
No matter if you choose to incorporate as an LLC or a Corporation, the strength of your corporate veil ultimately depends upon how well the owner has maintained clear and separate records of personal assets and business assets. When proper separation has been genuinely accounted for, the business can only lose what the business owns. This means retail space, equipment, liquid assets, or inventory. Your home, personal vehicles, personal bank account and other personal assets cannot be threatened by taken from you in the case of debt, lawsuit, or bankruptcy.
However, there are a few exceptions. The court may still find you personally liable for employees salaries, personally guaranteed debts (such as startup capital raised under your personal name prior to incorporation, or personally guaranteed loans), or unpaid payroll taxes. Once again, if you have kept strict separation in your borrowing, and have dutifully paid your employees and your taxes, these exceptions can be avoided.
There are of course additional steps a wise entrepreneur uses to strengthen their corporate veil. One of these is to purchase business insurance, as we have discussed before.
2. Build Credit for your Business
Another is to skillfully build credit in the name of the business. Having good credit can help you in the need for emergency funding. This can help you avoid defaulting on loans, or failing to deliver a product or service due to broken equipment.
Potentially more important though, establishing credit in your company reduces the need to offer personal collateral in the case of a failed business. Most banks and lenders will seek collateral for loans to a newly founded business. While many will likely need to take this risk for their first loan, avoid repeating this risk by building credit under the company’s name.
3. A Strong Corporate Veil
Finally, keep little liquid capital in your business account. In the case of debt or disaster, your business will only be able to pay out what it has. Your business account should have enough liquid funds to operate. If you work in a high-risk injury, this simple protection may save you in the future.
Ultimately, the strength of the corporate veil that separates your corporation’s assets from your personal assets is only as strong as you, the owner, choose to make it.
Always use the business’ card for business purchases. Use your business credit card for fuel in your commercial vehicles to quickly build credit while earning multiplied points. Pay your credit regularly and be responsible. Careful book keeping will shield you from most of the potential dangers of starting a business. If done right, all a new business owner has to lose is their initial investment.