Risks When Starting a Business

By John Cromwell

Starting your own business can be a very attractive option, but one that carries significant risks. Some of these risks can be mitigated by making the right decisions on legal matters, while other risks cannot be lessened in that way. If you do plan on starting a business, consider finding a mentor or someone who has started up her own business to help you gain additional insight.

Starting your own business can be a very attractive option, but one that carries significant risks. Some of these risks can be mitigated by making the right decisions on legal matters, while other risks cannot be lessened in that way. If you do plan on starting a business, consider finding a mentor or someone who has started up her own business to help you gain additional insight.

Risking Resources

To start a business, you need to gain access to assets to begin manufacturing your product or providing your service. Oftentimes, those initial asset contributions are made by you. If you organize your business in a way that does not offer a liability shield, such as a sole proprietorship, you are personally responsible to pay all of the business’ liabilities. This means that you have to use the assets of the business to pay off its debts, but if that is insufficient, you must make up the difference with your personal property. If you organize as a corporation or limited-liability company (LLC), you generally do not have to pay any of the business’ debts unless you used the business to defraud someone or you did not establish that the business was not merely an extension of yourself. However, what you contributed to the business initially is still at risk and will be used to settle the business’ obligations regardless of what form it takes.

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Income

While your business is getting off the ground, it may not be able to earn significant income. If you have employees, you will generally need to pay them before you pay yourself. This may mean a significant cut in your income which could put your home and way of life at risk. If your personal debts begin to outweigh your income, you may be forced to file for personal bankruptcy.

Work-Life Balance

Starting a business takes a significant amount of time. Generally you will not be able to afford to employ a lot of people, so each person will need to take on a significant number of tasks. Normally the founder of the business will take on as much work as he can handle to minimize his labor expenses. This means that as an owner, you will likely have less time for your friends, family and other pursuits.

Personal Credit

Regardless of what type of organizational form you choose, you may be required to personally guarantee any loans you take out to start your business. Since your business may not have a credit history while you would, it may be easier to get money personally than as a business owner. If you obtain funds through your personal credit cards or by co-signing any loans made to the business, you are personally responsible for paying back the debt regardless of whether your business is organized as a corporation or LLC.

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The Advantages of Incorporating Over Sole Proprietorship

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The Asset Protection of a Limited Liability Company

A limited liability company is a form of business ownership permitted by the laws of all the states. While an LLC provides the tax flexibility of a sole proprietorship or partnership, unlike those business types, LLCs offer asset protection by keeping the assets and debts of the company separate from the personal assets of the owners.

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