One of the main risks of starting a home-based business without knowing all the facts is getting your personal assets tied up in your business. What does this mean? It means that there is no clear, legal separation between the things you own as a person (home, car, bank accounts) and the assets you endow your business with (computer, printer, business accounts, stocks and inventories).
Thus, when an unhappy client, supplier or any other third party sues you, they may go after your personal assets as well as your business ones. You could end up having your accounts drained, including your children’s college funds, because you failed to protect them from business risks.
Even though you run a small and uncomplicated internet home business, this kind of risk exists. Either someone is unhappy with your products and claims false advertisement, or slips down on your front door steps as they come in person to pick up an order, or you fail to pay a supplier on time…all these are reasons for potential lawsuits.
In order to keep your personal assets safe from business risks, these are a few steps you need to take:
1. Operate Your Business as an Entity
It seems rather unnecessary to set up a LLC or a corporation for a small home-based business, but it is not. Let us remember what the letters LLC stand for: limited liability company. This means that when someone sues your business, the only assets they can go for in court are the subscribed capital and the assets owned by the business.
If, on the other hand, you operate your business in person, everything you own could be pursued in court as compensation for loss and damages. So, it is really unreasonable to take such a huge risk, just to avoid the minimum paperwork you need to fill in when you open a LLC.
2. Keep Your Personal and Business Finances Separate
When you start running your home-based business, you must open a separate bank account in the name of the business and conduct all your transactions with clients and suppliers through it. Likewise, when you buy equipment and office supplies for your business, they must be bought in the name of the business entity.
Having your personal and business revenues and expenses muddled together will make it hard for a judge to make delimitation between them when awarding claims in a potential lawsuit. And this is how many budding entrepreneurs lost many personal assets in court after being sued by an angry client.
3. Take up Adequate Insurance
Even as a LLC, you are not fully protected from personal liability in cases of tort. For this reason, you need to set up adequate general or professional liability insurance (as applicable). If you do not understand the reason for this, remember that your lawyer, who runs his practice as a business entity, also has malpractice insurance in his own name. As the saying goes, better safe than sorry.
4. Run Your Business with All Due Diligence
When a tort case is debated in court, the judge will look for proofs of negligence or fraudulent actions when determining whether to pursue the business owner’s personal assets. If you bring proof that you are doing business in an open and transparent manner, correctly informing your clients about your products and services, and in full compliance with all safety regulations and the BBB best practices, then you have demonstrated due diligence in running your business. In this case, there are far less chances for the judge to order the seizure of your personal assets.
5. Be Careful about Personal Guarantees
When you’ve just opened your business, it has zero credit history, so you may find it hard to obtain business credit. In all likelihood, you will be asked to bring personal guarantees in order to obtain a line of credit of a loan for your business. Be careful about what kind of assets you bring as personal guarantee, and work hard to build a good credit history for your business through timely payments for all your business bills. Thus, when your business is in good standing with the bank, you can set an appointment to remove the personal guarantee and have the business assets and its credit history as sole guarantees for your line of credit.
As you can see, it is not very difficult to keep your business and personal assets separate. You need to have all the information and make the clear delimitation between them from the very beginning of running your business, in order to protect your personal assets from business liability.