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Protecting your personal assets from your business creditors

Owning your own business was a long-time dream, and you made it come true. Nevertheless, you probably felt nervous about the amount of money at risk, particularly if you took out loans to get things started. Perhaps your spouse expressed concern that, if anything should go wrong with the business, the creditors would take the house and the personal bank accounts.

While running into financial trouble is not what you wanted to be thinking about when your business was so new, you did want to take steps to protect your personal assets from any financial liability.

Building a separate identity for your business

A relatively simple way for business owners to protect their personal finances is to form a limited liability company, which will keep your business's financial liabilities separate from your personal ones. To do this, you visit the office of the Secretary of State or Treasury in your state and fill out paperwork and pay the required fees.

Instead of using your Social Security number, your LLC will have its own federal tax identification number, so that your personal identity is not attached to your business identity. You may also wish to open a separate business bank account with carefully kept records of deposits and payouts indicating that you use the account strictly for business transactions.

The most common reasons why bankrupt business owners may lose their personal assets include:

  • Committing fraud
  • Mixing company money with personal assets
  • Using company assets for your personal purposes

Any of these actions may open you up to personal liability. If you are diligent about maintaining the business as an entity separate from your personal finances, chances are good that your company's creditors will not have access to your family assets.

Risking your personal security

Naturally, your new business may have had difficulty getting off the ground because it had not yet established credit, and you may have been tempted to use a personal loan to finance some aspect of the company. You may also have wanted a credit card or lease for the business, and those required you to sign with your personal guarantee. In these cases, if your LLC runs into financial trouble, your personal assets may become fair game for creditors.

If your business is struggling to pay its creditors and you are concerned about the impact on your personal assets, you may wish to consult with a lawyer. Your attorney will examine your company's accounts and help you determine the best course of action for your protection and the protection of your family.

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