Every business owner or entrepreneur should understand the basics regarding how to limit risk and protect a business from lawsuits and creditors. Here are five business protection strategies business owners and entrepreneurs should be implementing to protect both their business and personal assets.
1. Keep business and personal money and credit cards completely separate.
If you commingle your personal and business assets, your personal assets, including your home, personal bank accounts, and vehicles could become fair game in a lawsuit or judgement. Open a completely separate bank account for your business and always ensure that money coming into your business is going directly to the business and not through any personal account first.
2. Do not accept payments through your personal Venmo account.
Payment apps like Venmo have made sending and receiving money easy and convenient. But Venmo was originally designed for personal use and its user agreement requires that you apply for a Venmo business account if you want to use it for business. And right now, Venmo is not approving all business account requests. Also, using your personal Venmo for business transactions is commingling and can present the same issues mentioned above.
3. Choose the right business structure for your business and follow the proper formalities.
Whether your business should be an LLC, corporation, or limited partnership depends on a number of factors and should be carefully considered. You also need to consider whether your entity should be taxed as an S Corporation. And depending on your entity, there may be certain formalities your entity requires in order to limit your personal liability in the event of a claim, dispute, lawsuit, lien, or judgment. It’s important to talk to both an attorney and an accountant to help you determine the best structure for your business and the different required formalities for each structure.
4. Have a formal agreement.
Every single business needs to have a document that governs the business and its members/shareholders/partners. If you are an LLC, you need an operating agreement. Corporations must have Bylaws. If you have chosen to form a partnership (GP, LP, or LLP), then you need a partnership agreement. This is the most important document for your business, and you should not start operating without it.
5. Obtain appropriate liability insurance.
Every business should obtain liability insurance as it is the best defense against any claims made against your business. The type of insurance you need and your coverage will be based on your business, the services or products you provide, where you conduct business, how many employees you have, and other individual circumstances. Your business contracts with others may also require it. Speak with an attorney and a business insurance agent to determine what type of liability insurance is right for your business.