No entrepreneur wants their business to fail. Whether it’s a business run from home or a large enterprise, businesses only want growth and more profit. But home-based businesses are prone to failure because the people behind them often don’t have entrepreneurial know-how. In fact, in the U.S., 20% of new businesses fail during the first two years of being open, 45% during the first five years, and 65% during the first 10 years. Only a lucky few make it to decades.
In our previous blog ‘How Your Business Can Survive When Growth Happens Too Fast,’ we discussed what you should do when you’re faced with unforeseen expansion. But what will you do in the unlikely event that things go wrong and your home business goes bust?
The smart thing to do is to shield yourself against anything that may harm your personal assets. Here’s how to get started:
Get Expert Advice
Small business owners are go-getters, and that sometimes means that they refuse to get outside help. And while being hands-on is a good thing, it can also lead to irreversible mistakes. If at all possible, every move you make, especially when it comes to money, should be green-lit by a professional, like a lawyer or an accountant. These people know how to protect your personal assets in case of failure, and they can provide the best and least damaging advice if your business does go bust.
You might think that you don’t need help since you’re technically only a small, home-based business, but you can’t predict what’s going to happen in the future. The best thing to do is to still enlist the assistance of professionals.
Secure Insurance Coverage
You might think that insurance isn’t necessary since you’re only operating at home, but getting insurance coverage is actually part of effective asset protection. With the right coverage, you can protect both your business and personal finances. Similar to your health, home, and auto insurance, home-based business insurance helps you prepare for issues that could put a damper on your business finances or put you in the red.
Whether it’s Homeowners Policy Endorsement, In-Home Business Policy, or Business Owners Policy, get your insurance company on board as soon as you know that your business may be in trouble. This way you can find the best options to protect yourself early on.
File for Bankruptcy
When all else fails, filing for bankruptcy is necessary. You may feel that you don’t need to file by trying to fix everything yourself but may find yourself in serious legal trouble if you attempt to sell company assets without paying creditors in full.
If you’re struggling and can’t find a way out, you have the option to restructure debt all while retaining your assets. A New York Times article details how in the new part of Chapter 11 of the bankruptcy code designated as Subchapter 5, you have the chance of starting anew. The law enables a judge to put a restructuring plan in place even if creditors don’t like it, allowing the owner to continue running the business. That way, you have the opportunity to build your balance sheets while starting fresh or fixing your operations.
The Best Preemptive Protection
If your home business goes bust then there is a high chance that your personal assets could take a hit. Most home businesses are sole proprietorships and partnerships due to the ease with which they are set up. However, as they are not as well protected as other entities you are wide open to being personally liable. This is why the best preemptive move is to change your business entity to a limited liability company (LLC). An LLC separates an owner’s assets from that of their business so that they are personally protected from any debts, claims, or lawsuits. You won’t lose your car, home, or any personal finances not tied to the business if you go under. This switch needs to be done before any issues happen though, otherwise, you will still be fully liable as a sole proprietor.
Home businesses are risky ventures and it is always best to have a backup plan if things go wrong, as well as measures in place to reduce the chance of financial issues personally affecting you. We hope the above tips have helped.