How to protect personal assets when starting a business

When beginning a business venture, it’s helpful to know precisely what you’re getting yourself into, especially regarding the finance side of things. 

Many businesses are started by gaining a loan or using personal assets to put up the company in the initial stages, but often that can mean debt quite early on. So how do you protect your personal assets when starting your own business? 

• What are assets?
• How does company structure protect personal assets?
• How does insurance protect assets?

An asset is something of value that you own or lease. You can have personal assets as well as business assets that help you run the company. 

Business assets include:

• Vehicles
• Equipment (ranging from power tools and office supplies to laptops and computing items)
• Machinery
• Cash
• Stocks and investments
• A business property (if you have a mortgage on a premises)
• Stock if you are a product-based business

Personal assets are the valuables that you own that are not related to the business, such as:

• Personal savings and money in the bank
• Stocks and investments
• Cars that are not used for business purposes
• Valuable belongings (such as engagement rings or art)
• Your property (if you own your own home)

So how can you protect your personal assets when you start a business? If you want to avoid them being seized as part of debt repayment, it depends on how liable you are for the money you owe, and what liability you have as a business owner depends on your business structure. 

Sole traders have unlimited liability for business debt, and limited company owners will have limited liability. You may want to take this into consideration when choosing your business structure.

Unlimited liability means that a sole trader is personally liable (responsible) for any debts the business builds up. The company and the owner are not separate entities financially, so there is no limit to the amount of debt that the owner is responsible for paying back if the business was to fail and be unable to pay what it owes.

If the business cannot pay its creditors, lenders or banks, then the sole trader is personally responsible for paying them back. To do this, first, the business assets would be sold off, such as cash, equipment, furniture or vehicles. Then, if there is still debt left after this, the sole trader will risk their personal assets such as savings, cars or their home being seized to pay off the remaining balance owed. In the case of a partnership, both parties would be liable to pay the remainder of the debt with their personal assets.

The business’s finances are a completely separate entity from the owner’s personal finances in limited companies. This structure means if the company has to be liquidated, you will lose the value of your share in the business. Still, limited liability would protect your personal assets from being seized to pay the business debt. 

Larger businesses are almost always set up with limited liability as this allows them to attract investors who have less responsibility, so investing is less of a risk to them. However, investors are often unwilling to risk their personal money as well as their initial investment amount, so sole traders with unlimited liability may find it hard to gain independent funding.

If you want to protect your personal assets, you should consider setting up as a limited company. However, this does come with more tax and administrative obligations, so it may cost more to have someone help you manage it (like an accountant or financial advisor).

You can also ensure that the proper insurances cover your business to ensure that your personal assets are protected if the unexpected happens. 

For example, if a customer were to make a claim against your business for any reason, insurance would cover the legal fees and compensation associated with dealing with the claim. Costs could be in the tens of thousands even for a minor claim, which could be devastating to a small or new business. In addition, a claim without insurance could mean you had to cease trading, and your personal assets could be at risk to repay what you owe.

Here are some insurances that might be most relevant to cover your business and your personal assets in the event you need them:

• Professional indemnity insurance – protects you against claims made by dissatisfied clients if you make a mistake and are accused of professional negligence.
• Public liability insurance – covers your legal fees and compensation if a member of the public claims that they are injured in dealing with your business (for example, they tripped over your equipment) or your activities caused damage to their property.
• Personal accident and sickness – as a self-employed person, the money stops coming in if you cannot work. This insurance will cover your living costs if you cannot work for an extended period due to illness or injury and would mean you’d be able to pay any bills or debts while you were off sick.
• Business interruption insurance – provides financial assistance for lost revenue if you can’t work in your office because of fire, flooding, or other eventualities. This insurance would help pay any business debts while you were unable to bring in money.

The Countingup business current account makes it easy to manage all your financial data in one simple app. The app comes with free built-in accounting software that automates the time-consuming aspects of bookkeeping and taxes. 

You’ll receive real-time insights into your cash flow, profit and loss reports, tax estimates, and the ability to create invoices in seconds. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward.

Find out more here.