Starting a new business is exciting and thrilling, but it takes a lot of work to run smoothly. Aside from the regular thrills associated with operating a small business, business owners also have to deal with many uncertainties about the legalities of running their company.
Simply not finding the best Instacart car insurance can result in losing the majority of sole proprietors’ profits if an accident occurs. Experiencing situations as such is what many owners fear. The thought of losing it all if their business struggles to stay afloat or if someone sues them is one of many reasons why people avoid owning a business.
And this fear is compounded for individuals who are looking to operate their business with their personal income.
However, there are various types of insurance to purchase and routes to take when opening a business to ensure that an entrepreneur will legally be protected in any of these instances.
Choose the Right Legal Entity
Ensuring that you and your business are protected starts when you are forming your business and choosing the legal entity to work under. Many entrepreneurs operate as a sole proprietorship, but what they do not realize is that their personal assets can be seized if they are sued or owe a creditor. Those personal assets extend to your home, investments, and any other personal property that you own.
When individuals set their business up as a limited liability company (LLC) or a corporation, their personal assets are protected. Any debts their business owes will only be seized from the business’ income. Under both entities, you and any shareholders are shielded from personal liability if your business happens to go under via lawsuit or owing creditors.
The difference between an LLC and a corporation is how the profits and losses of a corporation are taxable to the corporation at a corporate rate, while the LLC (especially a single-member LLC) is taxed through the owners and shareholders. Fortunately, an LLC can choose between being taxed as a corporation or an individual, and the decisions depend solely on each entrepreneurs’ needs.
In the instances where you operate multiple businesses, you can set each portion of your operations under different legal structures. So if one operation happens to be sued, your other functions are not affected, and those assets are protected.
Creating a layered design for your businesses keeps you from losing all sources of income. Properly setting up your business structure is crucial, and a well-experienced business lawyer can advise you on making the right decisions.
Purchase Good Business Insurance
Once you decide how you want to structure your business legally, purchasing the right insurance and adequate insurance for your business is equally important. Setting up the correct legal entity protects your assets, there are certain situations where you would have to pay a settlement from your income instead of your business’ income.
To cover yourself in these instances, you should have your own business insurance policy with an insurer to serve as a defense against general liabilities. With that, each layer of your business should also have a separate business policy.
For example, one structure layer may need new auto insurance for the business as an added function to the policy, while the others do not. Aside from that, having different insurance policies simply protects the other businesses’ assets if one of them faces a lawsuit.
Here is a list of different types of insurance that a company could use:
- Professional liability insurance
- Property insurance
- Workers’ compensation insurance
- Product liability insurance
- Vehicle insurance
- Business interruption insurance
- Home-based business insurance
Always Separate Business and Personal Associations
A big mistake that first-time business owners make is not separating their business affairs from the personal ones. Immediately after registering your business as a legal entity with your state, the company name should be used for everything about your business’s operation.
This includes all documents, property, equipment leases, employer contracts, supplier agreements, and any checking or savings accounts the business’ assets go through.
Not switching business affairs under your business’ name could lead to you being held personally liable for any mishaps that may occur. Separating your personal and business finances is especially crucial when considering filing taxes. If, by chance, you are audited by the IRS, not having separate accounts could make it difficult for them to notate which transactions were actually for your business. If you wrote off a good portion of your income but cannot provide proof of these write-offs via bank statements or receipts, you could end up owing the Internal Revenue Service or face jail time along with paying fines.
Another good rule of thumb is to take care of your personal finances before starting a business because your financial management skills, whether good or bad, will reveal themselves when you manage your business finances.
Create a Thorough Contingency Plan
Another acceptable way to avoid financial turmoil outside of insurance coverage and routine maintenance is by creating a contingency plan.
Current circumstances caused by this pandemic have shown how no business is safe from tough times, so a contingency plan is a need for all business owners. If a business operation is your only source of income, then your finances may suffer when there is a downturn in business affairs.
Here is a list of ways to start mapping out your contingency plan if your business is your sole source of income:
- Secure a Salary: You or your spouse should plan to keep a salary with a day job, even if the business has enough income to cover household and personal expenses.
- Find a Side Hustle: Create other sources of revenue by consulting or by creating passive income streams. Real estate or advertising on a business website are examples of passive income.
- Start Saving: Build savings that can cover household and business expenses for six months to a year if things go downhill for your business.
- Don’t Burn Bridges: Leave your current employer on good terms so you can always pick up a day job should you need to supplement your income.
- Everyone Pitches In: Draft out ways that each family member can help financially or in other ways during tough times financially. Planning this out ahead of time could prevent added stress in instances of such.
Be a Smart Business Owner
As you can see, there are a lot of hoops to go through when starting a business. However, with the right guidance, getting through all of the obstacles is not impossible. Protecting yourself as a small business owner is not merely a suggestion; it is a need.
The fact of this may seem overwhelming but protecting yourself and your assets is the only way to ensure you have a prosperous future as a business owner.