Protecting Your Personal Finances from Your New Business
Important Do’s and Don’ts from a Legal Perspective
When you’re focused on getting your business off the ground, you may be unintentionally putting your personal and professional assets at risk. Luckily for business owners, there are several easy and affordable solutions to set you on the right path.
Learn more about these important aspects of starting a new business from Rob Turner, attorney and founding partner at InTown Legal based in Atlanta. Rob has been advising clients for over 15 years in the areas of legal business and commercial real estate. You can often find him coworking at Roam Buckhead.
“Most people, even those who’ve worked long careers in business, aren’t always informed about the nuances of the various types of legal structures or business formation options,” says Turner. “Typical structures include limited liability companies (LLCs), C corporations, S corporations, various types of partnerships and so on. It may not sound like a big deal, but each format has different consequences, so it’s important to determine the best option at the beginning, based on your long-term goals.”
Better Alternatives to Sole Proprietorships
For business owners, including entrepreneurs and freelancers, you default to being a sole proprietor unless you purposefully establish your business under another legal structure. As the default option, sole proprietorships are very common, which is unfortunate because they have some serious downsides.
“The challenge is that sole proprietorships offer no legal distinction between the owner and their business,” says Turner. “Your personal assets – what’s in your checking and savings account, etc. – are considered the same as your professional assets.” Bottom line: your personal income isn’t protected against your business’ risks and liabilities and vice versa.
Unfortunate But Not Uncommon Scenarios
The effects of not separating your personal and professional assets can be devastating. Consider these scenarios:
- Your business invents and manufactures a new gadget. Things are going well until the gadgets begin to malfunction and injure people. Now, not only is your business liable but your personal assets also aren’t protected from the incoming lawsuits.
- You cause a car wreck and seriously injure the people in the other vehicle. Your auto insurance should provide some financial relief in this situation. However, your business assets aren’t protected from any fines, damages or other monetary penalties you may owe because of your wreck.
- You and your spouse are going through a divorce. Your business could be divided between you and your former spouse as part of your shared assets. Do you want your former spouse co-owning half of your business? Can you afford to buy out their portion of the business to retain sole control?
Selecting a Legal Structure That Offers Protection
“Because of the risks inherent in operating your business as a sole proprietor, it’s critical that you understand the forms of entity protection available to you,” says Turner. “You’ll almost always be better off with a legal structure that offers more protection and distinguishes between your personal and professional assets.” A qualified attorney can help you determine the best format for setting up your business, whether it’s an LLC, C Corporation, etc. There are pros and cons to each one, and your short- and long-term plans for your business will affect the decision.
Going the Extra Mile
An Employer Identification Number (EIN) is similar to an individual’s Social Security Number (SSN), except it’s for a business. You’ll be required to have one if you want to hire employees, start a retirement plan and other specific activities. However, it might be worth getting one anyway.
“Even if you’re not required to have an EIN,” says Turner, “I encourage all new business owners to get one. It’s free. You can request it online from the IRS, and there are additional benefits to having one.” For example, some banks require you to have an EIN to set up a business checking account, savings account or credit card. In addition, it helps freelancers solidify their status as an independent contractor rather than an employee.
Protecting the Castle
For more legal do’s and don’ts that can benefit your new venture, seek the assistance of a qualified attorney. Start by asking your network for recommendations. Then you can review the lawyers’ websites, check the State Bar of Georgia website to ensure they’re in good standing, and set up a brief meeting with each attorney to gauge fit and inquire about fees, etc. Adding legal counsel to your stable of trusted advisers will help you protect – and grow – your business beyond just the idea phase.
LEGAL DISCLAIMER: This post should not be construed as exhaustive or as legal advice. Hire legal counsel to get accurate, specific advice for your situation.
With his experience at Big Law, in-house, a boutique technology practice, as well as his own firm, Rob Turner of InTown Legal brings a unique, well-rounded perspective that’s refreshing to business owners focused on the bottom line. When he’s not spending time with his family or volunteering with the Atlanta Ronald McDonald House, you can catch him at Roam Buckhead.