Own A Small Business? 3 Tips For Protecting Your Personal Finances From A Lawsuit

Starting a small business can be your ticket to a fulfilling career where you can act as your own boss, and the key to financial self-sufficiency. However, financial gains could be wiped out if you happen to be sued while your business is still very small and new. Furthermore, if you don't protect yourself, you run the risk of having your personal finances pursued as well as your business profits. For that reason, it's a good idea to learn how you can protect your personal finances from danger in the event that your small business is ever sued.

Choose the Right Business Entity

When setting up a small business, you have several options for creating a legal status for the business and establishing it as an entity separate from yourself. You could have a sole proprietorship or a partnership, you could form a Limited Liability Company (LLC) or you could form an S corporation or a C corporation.

There are different benefits and drawbacks to all of these structures, many of which have to do with how you plan to file taxes on the money that you make. However, you should know that forming an LLC or a corporation creates a legal entity separate from yourself, with its own finances and tax obligations, while sole proprietorships and partnerships do not. That means that if you want to protect your personal funds from a business lawsuit, your best bet is to form an LLC or a corporation.

Don't Mix Business and Personal

Even if you establish your business as a corporation or an LLC, you may not be adequately protecting your personal funds if you're mixing your personal and business bank accounts. In a courtroom, a judge could decide that since you were using business funds for personal purchases or funding payroll out of your family checking account, your personal finances are fair game. On top of that, mixing business and personal funds can lead to sloppy accounting and tax issues. All around, it's a poor business practice.

Establish a bank account for your business that's separate from your personal account. Your business should have its own checkbook, and payments made to the business should be in the business's name, not yours. This helps clearly mark the line between your business and personal finances.

Buy Insurance

There are many good reasons to purchase business insurance, and protecting your personal finances is one of the most important ones. As a small business, especially in the early years, you may have thin profit margins, you may be operating on a shoestring budget, or you may even be in the red. What happens if you're held liable in a business lawsuit but your business can't cover the damages? A court may decide to allow collection from your personal funds.

If your business has liability insurance, any complainant who files a lawsuit has a target to go after other than your business or personal bank accounts, and that target is your insurance policy. The policy adds another layer of protection between your business funds and your personal funds, and may also prevent your business from losing too much money to a lawsuit as well.

If you're unsure about which business entity is best for your small business, how to separate your business and personal funds, or which insurance you need to purchase, talking to a business attorney, such as Harshman & McBee, is a good place to start. A business attorney can advise you on these matters and others, and can also be called upon to defend your business in court in the event of a lawsuit.