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Protecting Your Personal Assets: Your #1 Goal As A Business Owner

For many of us, starting a business comes with a ton of challenges. How will we make enough to cover our expenses? Where will we find new clients? How will we clone ourselves to get the work done? There’s so much going on, we often overlook one essential task on our to-do list: to protect our personal assets. Let me explain.

Protecting Your Personal Assets, Your Number 1 Goal As A Business Owner

Sole proprietorships are the most popular business structure. They outnumber corporations or LLCs by about 19 to 1. And yet, a sole proprietorship is the single type of business entity that leaves you completely vulnerable as a business owner.

Under a sole proprietorship, the government doesn’t see a difference between your business and you as the owner of the business; as a result, you can be personally liable for any debts or expenses your business incurs. So if your business is sued, you will personally be responsible for paying any settlement or debt, and your personal assets, like your house, your car, your retirement and such, might be jeopardized in the situation.

If you decide to close your business or file bankruptcy, again, you’ll have vendors and businesses coming to claim what’s rightfully theirs. If your business doesn’t have the funds, they’ll take it from you.

Scary stuff, right?

Your Secret Weapon and Shield

Fortunately there are a few simple solutions to protecting yourself. One is the LLC. The Limited Liability Company separates you as the owner from your business. Your assets cannot be seized on behalf of the company’s debts.

There are other benefits to the LLC as well. You can keep your tax filing simple by “passing through” your company’s profits and losses to your personal taxes. You can also have members, and there are fewer restrictions to who can be one, compared to a corporation. In general the LLC is a little less formal than its big brother, the corporation.

But speaking of the corporation, there are also ample benefits there. You have the same protection of your personal assets, and you separate yourself as an entity. You can transfer ownership of a corporation, so if you decide down the road to sell your business, you can do so easily. Corporations have shareholders who own stocks in the corporation and with certain types of corporations such as the  S corporation, there are restrictions on who and how many shareholders you can have.

Having a corporation also makes it easy to establish credit for your business separate from your personal credit. And if you want to raise money through investors, they’ll more than likely want you to be a corporation. Best of all, corporations pay lower taxes than individuals, and we could all use a little cost savings!

There are several types of corporations to consider, depending on your unique business needs. The majority of small businesses, however, opt for the S corporation, as it has many tax benefits for entrepreneurs:

Final Note

So while you’re mired in managing your sales, accounting, and toilet paper supply, consider adding your business structure setup to your list of to dos. Once you file your paperwork with the state and get approved, you’ll breathe easier, knowing your personal assets are completely safe and your business is legal so you can focus on what you do best…innovating and growing your business!

Images: ”Female hands saving small house with a roof/Shutterstock.com

                                                                                                                                                                       

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Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO of CorpNet.com, a legal document preparation filing service, Nellie helps entrepreneurs start a business. Incorporate an LLC,or set up Sole Proprietorships (DBAs) for a new or existing business. http://www.corpnet.com

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Comments
  • Hi Nellie, Thanks
    for sharing this important information. As you’ve outlined, knowing and
    ensuring that your personal assets are safe allows you to get
    on with growing your business.

  • What is best way to protect your personal assets? In the blog post it is a house as an illustration. Is your house really an asset? Is it not more of a liability, if you don’t earn money from your home by renting out rooms, etc?

  • Great post Nellie, thanks for sharing!

    I’m wondering if there is a tipping point between sole proprietor and LLC. In other words, when is the right time to formalize your structure?

    Thanks, Thom

  • Hi Martin, the editorial team here at Tweak Your Biz picked the image so I guess I should answer your question. The image was picked to help communicate the message of the post but you are right – your house is strictly speaking an asset depending on whether you own it or owe for it 🙂

  • Nellie Akalp

    Hi Thom,
    Thanks for reading my post. In light of how easy and inexpensive it is these days to formalize the business with an LLC, if the business is making money, then I would say it is better to form the LLC as soon as possible as there may be greater tax savings and benefits coming your way as well. Let me know if I can assist you with the formation of the LLC; feel free to DM me to info@corpnet.com.
    My regards,
    Nellie

  • Nellie Akalp

    Hi Niall,

    My pleasure. Thank you for the oppty and stay tuned for much more great content coming your way in the upcoming weeks.
    Nellie

  • Nellie Akalp

    Thanks for reading my article. A house can def be considered an asset if there is equity in the house.
    The Sole Proprietorship is the simplest form of business entity. However, without
    the protection of a corporate shield, personal assets are exposed to business
    liabilities. And, even where a small business owner doesn’t have assets today, a judgment against that business owner can last up to 22 years. Therefore, in light of how easy and inexpensive it is to incorporate or form an LLC online today, the only real question is: Should I form an LLC, a C Corporation, or an S-Corporation? Here are the key factors to consider in selecting the right business structure:

    LLC (Limited Liability Company): In an LLC, the owner’s personal assets are
    shielded from business liabilities just as they would be in a Corporation. In addition, the IRS views the LLC as a “disregarded entity”. Thus, an LLC does not file separate taxes; company profits and losses flow through to the owners and are subject to each owner’s individual tax rates. The LLC is great for a business that wants liability protection, but seeks minimal formality. It’s also the perfect structure for a business with foreign owners since anyone (C Corp, S Corp, another LLC, a trust, or an estate) can be an owner of an LLC.

    C Corporation: This entity is not recommended for small business owners. The C Corp is ideal for a business that intends to raise capital by issuing stock or attracting
    investors through VC funding.

    S Corporation: An S Corporation is great for a small business owner who can qualify: The IRS places limits on the number of owners and who can be an owner in an S Corporation. Plus, all owners are taxed based on their percentage of ownership.

    Take some time to educate yourself on the different business structures. After all,
    your business is worth it.




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