Your Personal Assets Could Be At Risk
There are several business scenario’s that could put your personal assets at risk. Picture this- you’re out on a job and one of your guys leaves the gate open allowing the customer’s AKC registered German Sheperd to escape, not to be seen again. In addition to being heartbroken, your customer loses hundreds of thousands in breeding fees and puppy sales. Hopefully your insurance covers the loss…if not, you’re on the hook for it! And if the business doesn’t have enough assets to cover it, the next items going up for sale may be your car or even your house! Can you avoid this nightmare? Absolutely! You just have to separate yourself from your business by choosing a formal business structure.
Step 1: Formalize Your Business Structure
Lot’s of people start out in business as a sole proprietor or partnership because it’s simple. Unfortunately, these business structures don’t provide any protection for your personal assets. In the eyes of the law, you and your business are one in the same.
It is relatively simple to form a Limited Liability Company (LLC) and by doing so, limit the amount of personal assets at risk. Fees vary from state-to-state, although most are relatively low. Many states have an online application and some even provide you with boiler-plate documents like your “Articles of Organization”. I would start by searching the web for “ Form an LLC in XYZ State”. Some people like to enlist the services of an attorney in getting themselves organized, but this isn’t a requirement.
The one question that usually stumps people when forming their LLC is who will act as the “Registered Agent”. The answer is the person who is responsible for receiving and responding to government correspondence. Typically that person is you; however there are agencies who will fill in for you.
Step 2: Register for Your Employer Identification Number (EIN)
After you’ve registered with your state, you need to apply for your Employer Identification Number from the IRS. Uncle Sam has made this super simple; just click here and follow the instructions. When you’re finished you will receive your number along with a letter explaining that it has been assigned to your business.
Step 3: Open a Business Bank Account
Armed with the letter you received when you applied for your EIN, you are now ready to visit your banker. The documents required can vary so be sure to find out what you need before showing up at the bank. All banks will require proof of identity, a printout of your records showing that you formally organized your business with the state, and a copy of your EIN letter.
Don’t skip this step. It’s crucial for you to have a separate bank account for your business and personal funds. If you keep your money all in one bank account, it can be argued that you didn’t really intend for the business to be separate from your personal belongings. Meaning it’s all fair game when it comes to collections. Further, having a dedicated business bank account makes it much easier to maintain accurate financial records for your business.
Step 4: Register for Any Local Business Licenses
If you are already operating your business, hopefully you have already looked into what state and/or local business licenses you need. This requirement can sometimes change once you become an LLC so I would check again.
You have come a very long way towards protecting your assets. In doing so you have also added an additional level of legitimacy to it. Take a minute to pat yourself on the back then let’s talk about what comes next.
Keeping your personal and business transactions separated is key to maintaining the protection you just put in place. So, if you haven’t done so before, you must get organized in how you track your customers, income, and expenses. Being proactive now can save you a lot of headaches (and a lot of $) later. If you need help getting started, follow us online for tips or reach out for a free consultation.