With the rapid advancements in technology, there has been a massive rise in self-identified entrepreneurs. In 2015, the Global Entrepreneurship Monitor reported that 27 million working Americans had started new businesses. Entrepreneurs are necessary for the growth of the Global economy. When successful, entrepreneurs’ advances can improve the standard of living, create jobs, and form new opportunities for other burgeoning business owners.
The entrepreneurs among us are imaginative, brave, inventive, and committed. They also are masters at wearing many hats—especially in their early startup days. While this is advantageous in moving the needle forward and for cutting costs, it can also cause the entrepreneur to neglect necessary aspects of his/her business. One of the most critical oversights is in how entrepreneurs opt to protect their business and personal assets.
When success hits, it often hits suddenly. Rarely have startup founders taken the proper measures to handle their sudden increase in wealth. Another problem? They may not have formed the proper business entity from the outset, which can create a headache later when income increases.
Here are four crucial asset protection strategies every entrepreneur should consider, especially at the beginning of their startup career:
Avoid Sole Proprietorship
When entrepreneurs are just starting out, the best type of business entity to have is likely the last thing on their mind. Instead the focus is on finding core team members, bootstrap marketing hacks, or even just fine tuning a product. They figure if income isn’t coming in waves, why bother doing more than forming a simple DBA, and operating as a sole proprietorship? The issue here is that personal assets are at risk of potential lawsuit, including bank levy by creditors they may still owe from their pre-entrepreneurial years. Establishing an actual entity, such as a limited liability company (LLC) or an S corporation, is an essential step in the protection of one’s assets. If forming an LLC, it’s important to choose to be taxed as a corporation, rather than a sole proprietor. This keeps the business a completely independent entity to prevent any comingling or confusion of assets.
Invest in Suitable Business Insurance
Insurance may seem like the most tedious “to-do,” but it should absolutely be incorporated in any startup’s budget. Having insurance is a way to mitigate potential risks and handle outstanding incidents that could arise, giving plaintiffs alternative targets. Of course, it goes without saying that the insurance needs will vary from business to business (i.e. the insurance needs of a restauranteur will be drastically different than someone who’s launched an e-commerce startup).
Maintain a Distinction of Assets
Even when a business entity has been properly filed, entrepreneurs still can make the mistake of financial enmeshment. Financial or asset enmeshment occurs when personal funds make their way into a business account, or a commercial business property remains under the individual owner’s name rather than the corporation’s. Entrepreneurs can protect themselves through separate bank accounts and company logs.
Consider Opening a Trust
If insurance seemed overwhelming to an already overwhelmed entrepreneur, the idea of opening a trust may take things to a whole other level. However, by placing one’s home, cash, stocks, or other property into an irrevocable trust can offer protection from corporate debts or other legal obligations. Within a standard irrevocable trust, the trust owns the assets while an independent trustee oversees it to profit designated beneficiaries, such as a spouse, relative or children.
Entrepreneurs may find these strategies intimidating or even write them off as too time-consuming. With the assistance of an experienced attorney familiar with asset protection for entrepreneurs and business owners, however, they are easy to tackle. And by taking the steps to protect their businesses and assets, entrepreneurs have one last issue to add to their insurmountable to-do lists.