Here’s How to Protect Your Personal Assets from Business Liability

Our experts identify 6 steps small business owners need to know.
Assets and Liabilities
Making sure all business work is done under the business title is imperative to protecting personal assets as a small business owner. (Tashatuvango/Shutterstock)

Are you grappling with how to protect your personal assets yet build capital for your small business? Does the idea of liability in the event of an accident at your business keep you up at night?

Melinda Kibler, a financial planner for Palisades Hudson Financial Group LLC in Fort Lauderdale, Florida, understands your fears.

“Once you create your business,” she said, “it is important to make sure all business work is done under the entity (business) title. Business owners should never mix business and personal accounts. The entity should have its own bank account, and any assets acquired should be under the business name.”

Keeping your personal assets protected and separate from your business is key. Here are six strategies to help you accomplish that goal:

1. Create a business structure

Inaki Berenguer, co-­founder and CEO of CoverWallet, is familiar with the worries of starting a business. He believes it is imperative for small business owners to select a business structure that limits personal liability. The best way to determine which structure is right for your business is to consult with a lawyer who has experience working with small business owners.

The most common options for small business structures include:

  • Sole proprietorship: The simplest structure, a sole proprietorship does not separate the individual from the business, and therefore it provides less protection than the following types. Kibler said this structure leaves the business owner personally exposed to any liabilities of the business.
  • C corporation: According to Kibler, this structure provides asset protection, but it is subject to double taxation, meaning the income is taxed both on the entity level and owner level when the income passes through to the shareholders.
  • A limited liability company: This is the most popular business structure for small-­business owners. “This structure is very flexible, providing liability protection to the business owner, while allowing profits and losses to flow directly through to the owner’s tax return, without being taxed at the entity level,” Kibler said.

Berenguer agreed: “Change your business structure from a sole proprietorship in which you are personally liable for business operations to a corporation or limited liability company where you are not held liable if things go wrong.”

2. File for a homestead exemption

The homestead exemption protects a certain value of your home from creditors and bankruptcy. In some states, it can protect the entire value of your home. Kibler said it is important to learn your state’s rules for homestead exemptions.

“If someone sues you, the judgment holder cannot force you to sell your home in order to pay off the judgment. It is important to note, however, that a mortgage foreclosure would trump this rule, so this is most beneficial when your home is already paid off,” Kibler said.

3. Obtain insurance

Small business owners should acquire insurance under the business or entity name to protect against incidents that may occur.

“Be sure to read the fine print closely so you understand exactly what coverage you are receiving,” Kibler said.

Both Kibler and Berenguer recommended obtaining general liability, property, professional liability insurance and worker’s compensation if you have employees. Berenguer said it is important to understand the risks specific to your industry. The exact coverage you need depends on the type of business you run.

“Having the right insurance gives you the peace of mind to focus on what matters – running your business,” Berenguer said.

4. Modify your insurance as your business changes

If you offer new services or products, have grown significantly in revenue, recruit new employees or change locations, then your insurance policies, coverages and limits should adapt as well.

“For example, if you are a restaurant and start a catering service, your insurance policies will most likely need to change. You may also need additional coverage to protect your new revenue stream,” Berenguer said.

5. Prevent accidents

“The best risk insurance is prevention,” Kibler said. She emphasized the importance of employee management and training in maintaining a safe work environment.

“The best way to prevent accidents from happening is by understanding who it is you are hiring through good background checks, training your employees and proper maintenance of your equipment and offices,” Kibler said.

6. Avoid running out of business cash

Berenguer said business owners must know the difference between cash flow management and revenue management. They are not necessarily the same thing. Cash is money you have today, and revenue is money you may have now or in the future.

“Make sure you’re not spending more than you have by consistently evaluating your accounts payable and receivable,” Berenguer said. “Although it may sound trivial, many small business owners run out of money and are forced to shut down, even when the business is doing well.”

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