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How  Does Forming a Business Entity Protect Your Assets?

by | Jun 9, 2022 | Firm News

Many entrepreneurs hit the ground running with their businesses without taking the proper steps to protect their personal assets. Unfortunately, without the proper protection in place, events like work-related vehicle or in-office accidents, faulty products, sexual harassment, breach of contract suits, and employment discrimination claims could take you from being a successful business owner to the verge of bankruptcy.

Protect your personal assets from business problems

I’m Neil Fridman with the Fridman Law Firm PLLC. Today, I want to help you understand how forming an LLC or other business entity can protect your personal assets from problems that might arise in your business. Forming a business entity is all about building layers of protection between yourself and the things that might go wrong as you run your company.

Building layers of protection

The first thing forming a proper entity does is build a barrier between your personal assets and your business. Business entities build an asset shield. If you operate a business without forming a legal entity, you are considered a sole proprietor. While this is the easiest way to become your own boss, sole proprietors often operate using their own social security number, which exposes their personal assets to the business.

When you form an LLC, a corporation, or another legal business entity, you’ll obtain an employer identification number or EIN, which will allow you to open a business banking account and separate your personal assets from the company’s assets.

This means that your personal assets are protected from creditors and lawsuits, and in most cases, you only stand to lose the money you invest in the company. This asset shield is the primary reason business owners set up proper business entities.

Business insurance

Forming a business entity will also allow you to obtain an additional layer of protection through business insurance. In addition to protecting your personal assets, an entity gives you access to various types of business insurance.

Depending on the type of business you own, you may work with clients that require you to carry a specific general liability or product liability insurance policy. The most common policies are general liability insurance, professional liability insurance, and business property insurance.

Other types of insurance to protect you

But there are other types of insurance, and depending on what type of business you own, you’ll want to explore more options specific to your industry. Insurance for your company can help you minimize your financial losses, protect you against certain legal claims and unexpected events, cover your employees’ medical expenses and lost wages, improve your businesses credibility, and more.

Separating your personal assets from the business and helping you obtain additional layers of protection through insurance are the two primary ways a business entity protects your personal assets. However, it’s important to keep in mind that there are some exceptions to limited liability.

How you could lose that protection

Forming an entity does not offer absolute protection to business owners. As the owner of a business, you can still be held personally liable if you a) personally and directly injure someone, b) personally guarantee a bank loan which your business defaults on, c) intentionally commit fraud, or d) treat the business as an extension of your personal affairs and co-mingle assets of your business with your personal assets.