If you don’t want to be personally liable for your business debts or any lawsuits that arise against your business, you need to take steps to protect yourself. One of the most effective strategies is to incorporate your business. Incorporation establishes your business as a separate entity from yourself.
To explain, imagine your corporation takes out a loan but doesn’t pay it back. If your business was not incorporated, the bank can go after you for the funds. Since the business is a corporation, the bank can only go after the business and its income or assets. You are safe. The same is true with lawsuits. Note that if the bank required you to make a personal guarantee on the loan, your personal assets are at stake. In that case, you are essentially acting as a liable cosigner for your corporation.
If you aren’t ready to incorporate, you should take out liability insurance. For instance, if you are a caterer, you need liability coverage in case someone gets food poisoning and sues you. If you are an accountant or a lawyer, you need coverage in case someone takes out a professional malpractice claim against you. Talk with your insurance agent about possible scenarios to ensure you get the best coverage for your industry. If you are already incorporated, you may still want to get liability coverage for your corporation. That extra protection can be essential.
You may also want to consult with an attorney about liability issues. If you run your contracts in front of an attorney, you can ensure that the terms are ironclad and that you aren’t accidentally opening yourself to any liability issues.
As a business owner, you take a lot of risks. Luckily, there are a lot of steps you can take to protect yourself financially and personally. With the right safeguards in place, you can rest easy and focus on your business.