Passionate entrepreneurs too often leap into small business ventures without considering the possibility of financial failures. Whether the innovation you bring to the table doesn’t result in a sustainable revenue stream or someone files a civil lawsuit, it’s critical to have a fallback position that protects your personal assets.
According to data published by the U.S. Bureau of Labor and Statistics, approximately 20% of small businesses falter in the first two years, and about half fail within five years. Possessing business insight and optimism about success must be tempered by employing an asset protection plan that gives you a viable exit strategy.
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How do business entities protect my personal assets from business lawsuits?
Some newly-minted business owners end up choosing to operate, at least initially, as a sole proprietorship. It’s easy and no special filing is required. Business income and losses are reported on your personal tax return, which seems easy enough. Sole proprietorships, however, do not provide limited liability protection for your personal assets. Because you and the business are one entity, your personal assets are vulnerable if you are sued, lose the lawsuit, and are required to pay damages out of your own pocket.
One of the miracles of incorporation is limited liability, the ability to shield your personal assets from lawsuits that arise from your business activities. Although every case differs, an S Corporation or a Limited Liability Company (LLC) typically provide good personal asset protection. Rocket Lawyer can help you get your business name reserved and the proper paperwork filed for the business entity of your choice, be it an LLC, S-Corp, C-Corp, or Non-Profit. You can also find answers to questions about the relative advantages and disadvantages of each business entity. If you have a specific question about asset protection and your particular situation, ask a lawyer and get quick and expert advice.
Is it okay to mix personal and business resources?
Most experts agree that it is not a good idea to mix personal and business resources if you are at all concerned about limiting your personal liability against business lawsuits. Keeping personal and business financial accounts separate and only paying for business expenses from business accounts, and not from your personal accounts, is an important way to demonstrate that your business is run as a separate entity. Even if you have a state sanctioned LLC along with an operating agreement, tight adherence to business operating procedures that show you are maintaining this separation can help to keep your personal assets safe.
Do I need to use formal business agreements and procedures?
Inexperienced business owners sometimes fall into the habit of conducting business informally. This may include using text messages or emails in the place of a formal lease agreement or contract. It’s also common for even experienced business owners to grow comfortable with subcontractors and not bother signing standard documents.
It may seem counterintuitive, but even though these agreements are strictly business, a savvy civil litigator can use them as evidence to bridge the divide between personal and company activities. The value of utilizing only thoroughly vetted legal documents cannot be understated. Protect yourself and your business by making sure you have business contracts in place for all of your key transactions. Rocket Lawyer has contracts and business agreements that can be customized to cover your specific business needs.
What are some preventative measures I can take to protect my personal assets from business lawsuits?
There are two basic ways to prevent a lawsuit or bankruptcy filing from impacting your personal assets. The first step is to take proactive measures that demonstrate you are an ethical business leader. Meet industry expectations such as securing adequate business insurance to cover accidents, injuries, or unanticipated harms. Make sure your workplace meets or exceeds OSHA guidelines and products pass safety standards. It’s also worth considering an umbrella insurance policy that covers business and personal liability. After you consult with a lawyer about these and other proactive steps, what you don’t do can save you from personal losses.
- Don’t leave your business entity underfunded.
- Don’t promise a creditor you will pay them personally.
- Never sign a personal guarantee for a business deal.
- Never use the corporation for a reckless or unethical endeavor.
- Don’t market or brand the entity as if it is you and not a corporation.
It’s also important to include your corporate title when signing legally binding agreements. For example, you would be wise to use a signature that states “Jane Doe, CEO” rather than just Jane Doe. When added up, subtle distinctions can add up to robust personal asset protection.
Protect your personal assets
There are wide-reaching resources available for entrepreneurs to help with business planning and asset protection. Rocket Lawyer is here to help you choose the right entity for your business and file all of the required paperwork to make it happen. Rocket Lawyer On Call® attorneys are also here to answer your questions and help you reach your goals.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.