One of the biggest mistakes small business owners can make is to fail to protect themselves from personal risk. While owning a business is challenging and rewarding, there are risks involved. What you don’t want is a legal issue or financial setback from work to spill over into your personal life. Here are three ways to insulate your business from personal risk.
Register it as a Legal Entity
The first step any small business owner should take is to separate their company from their personal life by registering it as a legal entity. There are several options for this. The most common legal entity for small businesses is the limited liability company (LLC). An LLC is a legal entity that exists and operates completely separate from its owners.
When you register your business with your state as an LLC, your company will take the fallout for any financial losses or other liabilities. Your personal assets are protected. While a sole proprietorship is an option, it offers no protection for you personally.
Open a Separate Bank Account
With an LLC, you are legally required to keep your business funds and expenses separate from your personal funds and expenses. Failing to fully separate business and personal funds can cause your LLC protection to be revoked. Even with a sole proprietorship, separating your personal finances from business finances is highly recommended.
To do this, you should have completely separate bank accounts for your business and your private funds. When you register your business as an LLC, you will receive an employer identification number (EIN). You should open a business account using your unique EIN.
If you decide to go with a sole proprietorship, be sure to purchase insurance. At the very least, consider getting general liability insurance. This will protect you from claims of bodily injury or property damage caused by your business. You should also consider getting product liability coverage. This type of insurance protects you from claims that bodily injury or property damage was caused by one of your products. Even with an LLC, it is always a good idea to purchase insurance for your business.
Kudos to you for starting your own business! It takes a lot of hard work and dedication to get this far. Now, be sure to protect yourself from personal risk. You don’t want business setbacks to spill over into your personal life. Take the action required now to protect yourself.
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