Small business owners often fund their own business growth and capital needs. Saving money to start a business is a smart choice for anyone that doesn't want to take out a loan, often with a personal guarantee, to start up their business.
Small business owners choose to incorporate so that they have liability and asset protection.
But when you mix personal assets with business assets, you may be risking some of the protections that incorporating offers.
Insurance Purposes and Small Business
There's insurance for a commercial vehicle and a pedestrian vehicle. But let's assume that you were using your personal vehicle for commercial purposes. A lot of small business owners do the same thing, but what happens if you're in an accident?
Did you know that five insurance companies account for 55% of the entire U.S. car insurance market?
Insurers often fight against themselves when a lawsuit occurs (you and the opposing driver have the same insurer). And when you're driving a personal vehicle for business, you may not be covered, depending on the nature of the business.
Commercial insurance may provide you with coverage for lost inventory or goods in the vehicle. Insurance may also replace the vehicle with a similar rental vehicle.
Let's assume that you have a very expensive vehicle that is "used for business," but you own it as a personal business. When the vehicle is mixed into the business's operations, it's possible that a lawsuit may ask you to sell the vehicle to satisfy a settlement.
If the vehicle was never used for business purposes, the corporate veil would protect the asset from business liabilities.
Corporate Funds and Individual Funds Should Be Separate
Corporate and personal funds need to be kept separate. A major mistake business owners make is that they run a small business and use their own personal bank account. This may be less time consuming and easier to do, but what happens if you're sued for a personal injury?
If all of your personal funds are in the same bank account used in your course of business, they may be frozen.
There's no way to differentiate personal and business funds, so you risk losing the entirety of the funds in the bank account – never a good idea.
This also means paying corporate taxes from corporate accounts – not personal accounts.
Any of the assets that you own may be considered a part of the business if they're used in the course of business. Even a computer can be considered a business's asset if you personally own it but use it for business purposes.
Small businesses are best protected by the corporate veil when they maintain a clear distinction between business and personal assets.
Working with a professional when forming your business allows you to protect your personal assets from the start of your business's operations. Even if the risks of personal and business assets mixing are small and the risk of being the subject of a lawsuit may be low, it's a risk that can cause you to lose personal assets in a settlement.
Filed under: Work Life Balance