<p>If you start a sole proprietorship or a partnership, you could be held personally liable for almost anything related to the business; that means you will be responsible for paying any business-related debts you incur and you could be sued by your clients, employees, etc.</p><p><em>If you start an LLC, you'll have some degree of liability protection. These business structures allow your business to be treated as if it were an individual of its own. The business itself can take out a loan, incurred debt, and be the target of costly lawsuits - reducing your personal exposure to these financial risks.</em></p>

Establish an LLC (limited liability company) or a Corporation

<p>New business owners are tempted to fund the business themselves, even if they don't have the savings to cover those expenses. They take out personal loans, max out their credit cards, or incur debt in other ways to get the money they need.</p><p><em>A few minor expenses here and there won't hurt you, but for the most part, you should never take out personal loans. Instead, work with investors, tap into your savings, or rely on your business credit to take out loans in the business's name.</em></p>

Never Take Out Personal Loans

<ul><li><strong>Budgeting and frugality</strong>: Be smart with your budgeting and try to remain as frugal as possible.</li><li><strong>An emergency fund</strong>: Set aside at least enough money to cover a few months of personal expenses.</li><li><strong>Tax-advantaged investment vehicles</strong>: With any extra money, use tax advantage investment vehicles to maximize your savings and plan for retirement. </li></ul>

Focus On Independent Saving Strategies

<p>Try to diversify your income streams,<strong> both inside the business and on a personal level</strong>.</p><ul><li><em>Within the business, that could mean selling multiple different types of products and services, monetizing your content or applications in different ways, or even targeting different audiences. </em></li><li><em>The same principle applies to you as an individual. You can diversify your income streams by investing in dividend-paying stocks, investing in real estate, starting independent blogs or websites, or even picking up side gigs.</em></li></ul>

Diversify Your Income Streams

<div dir="ltr"><button type="button" aria-label="White" role="menuitem" aria-checked="true" dir="ltr">White</button><button type="button" aria-label="Black" role="menuitem" aria-checked="false" dir="ltr">Black</button><button type="button" aria-label="Red" role="menuitem" aria-checked="false" dir="ltr">Red</button><button type="button" aria-label="Green" role="menuitem" aria-checked="false" dir="ltr">Green</button><button type="button" aria-label="Blue" role="menuitem" aria-checked="false" dir="ltr">Blue</button><button type="button" aria-label="Yellow" role="menuitem" aria-checked="false" dir="ltr">Yellow</button><button type="button" aria-label="Magenta" role="menuitem" aria-checked="false" dir="ltr">Magenta</button><button type="button" aria-label="Cyan" role="menuitem" aria-checked="false" dir="ltr">Cyan</button></div><div dir="ltr"><button type="button" aria-label="100%" role="menuitem" aria-checked="true" dir="ltr">100%</button><button type="button" aria-label="75%" role="menuitem" aria-checked="false" dir="ltr">75%</button><button type="button" aria-label="25%" role="menuitem" aria-checked="false" dir="ltr">25%</button></div><div dir="ltr"><button type="button" aria-label="200%" role="menuitem" aria-checked="false" dir="ltr">200%</button><button type="button" aria-label="175%" role="menuitem" aria-checked="false" dir="ltr">175%</button><button type="button" aria-label="150%" role="menuitem" aria-checked="false" dir="ltr">150%</button><button type="button" aria-label="125%" role="menuitem" aria-checked="false" dir="ltr">125%</button><button type="button" aria-label="100%" role="menuitem" aria-checked="true" dir="ltr">100%</button><button type="button" aria-label="75%" role="menuitem" aria-checked="false" dir="ltr">75%</button><button type="button" aria-label="50%" role="menuitem" aria-checked="false" dir="ltr">50%</button></div><div dir="ltr"><button type="button" aria-label="Arial" role="menuitem" aria-checked="true" dir="ltr">Arial</button><button type="button" aria-label="Courier" role="menuitem" aria-checked="false" dir="ltr">Courier</button><button type="button" aria-label="Georgia" role="menuitem" aria-checked="false" dir="ltr">Georgia</button><button type="button" aria-label="Impact" role="menuitem" aria-checked="false" dir="ltr">Impact</button><button type="button" aria-label="Lucida Console" role="menuitem" aria-checked="false" dir="ltr">Lucida Console</button><button type="button" aria-label="Tahoma" role="menuitem" aria-checked="false" dir="ltr">Tahoma</button><button type="button" aria-label="Times New Roman" role="menuitem" aria-checked="false" dir="ltr">Times New Roman</button><button type="button" aria-label="Trebuchet MS" role="menuitem" aria-checked="false" dir="ltr">Trebuchet MS</button><button type="button" aria-label="Verdana" role="menuitem" aria-checked="false" dir="ltr">Verdana</button></div><div dir="ltr"><button type="button" aria-label="None" role="menuitem" aria-checked="true" dir="ltr">None</button><button type="button" aria-label="Raised" role="menuitem" aria-checked="false" dir="ltr">Raised</button><button type="button" aria-label="Depressed" role="menuitem" aria-checked="false" dir="ltr">Depressed</button><button type="button" aria-label="Uniform" role="menuitem" aria-checked="false" dir="ltr">Uniform</button><button type="button" aria-label="Drop Shadow" role="menuitem" aria-checked="false" dir="ltr">Drop Shadow</button></div><div dir="ltr"><button type="button" aria-label="White" role="menuitem" aria-checked="false" dir="ltr">White</button><button type="button" aria-label="Black" role="menuitem" aria-checked="true" dir="ltr">Black</button><button type="button" aria-label="Red" role="menuitem" aria-checked="false" dir="ltr">Red</button><button type="button" aria-label="Green" role="menuitem" aria-checked="false" dir="ltr">Green</button><button type="button" aria-label="Blue" role="menuitem" aria-checked="false" dir="ltr">Blue</button><button type="button" aria-label="Yellow" role="menuitem" aria-checked="false" dir="ltr">Yellow</button><button type="button" aria-label="Magenta" role="menuitem" aria-checked="false" dir="ltr">Magenta</button><button type="button" aria-label="Cyan" role="menuitem" aria-checked="false" dir="ltr">Cyan</button></div><div dir="ltr"><button type="button" aria-label="100%" role="menuitem" aria-checked="false" dir="ltr">100%</button><button type="button" aria-label="75%" role="menuitem" aria-checked="false" dir="ltr">75%</button><button type="button" aria-label="50%" role="menuitem" aria-checked="true" dir="ltr">50%</button><button type="button" aria-label="25%" role="menuitem" aria-checked="false" dir="ltr">25%</button><button type="button" aria-label="0%" role="menuitem" aria-checked="false" dir="ltr">0%</button></div><div dir="ltr"><button type="button" aria-label="White" role="menuitem" aria-checked="false" dir="ltr">White</button><button type="button" aria-label="Black" role="menuitem" aria-checked="true" dir="ltr">Black</button><button type="button" aria-label="Red" role="menuitem" aria-checked="false" dir="ltr">Red</button><button type="button" aria-label="Green" role="menuitem" aria-checked="false" dir="ltr">Green</button><button type="button" aria-label="Blue" role="menuitem" aria-checked="false" dir="ltr">Blue</button><button type="button" aria-label="Yellow" role="menuitem" aria-checked="false" dir="ltr">Yellow</button><button type="button" aria-label="Magenta" role="menuitem" aria-checked="false" dir="ltr">Magenta</button><button type="button" aria-label="Cyan" role="menuitem" aria-checked="false" dir="ltr">Cyan</button></div><div dir="ltr"><button type="button" aria-label="100%" role="menuitem" aria-checked="false" dir="ltr">100%</button><button type="button" aria-label="75%" role="menuitem" aria-checked="false" dir="ltr">75%</button><button type="button" aria-label="50%" role="menuitem" aria-checked="false" dir="ltr">50%</button><button type="button" aria-label="25%" role="menuitem" aria-checked="false" dir="ltr">25%</button><button type="button" aria-label="0%" role="menuitem" aria-checked="true" dir="ltr">0%</button></div><p>By contrast, if you start a limited liability company (LLC) or a corporation, you'll have at least some degree of liability protection. These business structures allow your business to be treated as if it were an individual of its own. The business itself can take out a loan, incurred debt, and be the target of costly lawsuits - reducing your personal exposure to these financial risks.</p><p>Just be aware that this doesn't grant you unlimited liability protection; it's still possible to take on personal debt and you can be legally responsible for actions of gross negligence in many scenarios.</p><h2>Never Take Out Personal Loans</h2><p dir="ltr">New business owners are tempted to fund the business themselves, even if they don't have the savings to cover those expenses. They take out personal loans, max out their credit cards, or incur debt in other ways to get the money they need. A few minor expenses here and there won't hurt you, but for the most part, you should never take out personal loans. Instead, work with investors, tap into your savings, or <a href="https://www.experian.com/small-business/establish-business-credit" dir="ltr">rely on your business credit</a> to take out loans in the business's name.</p><h2>Focus On Independent Saving Strategies</h2><p>You'll be far less exposed to personal financial risk if you have a strong financial foundation. That means having ample savings do withstand volatile income changes as your business develops and reduce the impact of a total business collapse.</p><UL><LI><b dir="ltr">Budgeting and frugality -&nbsp;</b>Be smart with your budgeting and try to remain as frugal as possible. If you don't have much in the way of savings and your business is going to be your primary source of earnings, you need to live a modest lifestyle and focus on pocketing your extra income.</LI><LI><b dir="ltr">An emergency fund&nbsp;</b>- It's also a good idea to put together a robust emergency fund. Set aside at least enough money to cover a few months of personal expenses. This way, if your business has a bad month or two, or if the business undergoes a total collapse, you can buy yourself enough time to properly respond.</LI><LI><b dir="ltr">Tax-advantaged investment vehicles -&nbsp;</b>With any extra money, use tax advantage investment vehicles to maximize your savings and plan for retirement. For example, the Roth IRA in the United States can help you grow retirement savings tax-free, while the <a href="https://www.cstspark.ca/en/learning-centre/rate-of-return-in-RESP" dir="ltr">RESP rate of return</a> in Canada can help you save for your children's college education.</LI></UL><h2>Diversify Your Income Streams</h2><p>Next, try to diversify your income streams, both inside the business and on a personal level. Within the business, that could mean selling multiple different types of products and services, monetizing your content or applications in different ways, or even targeting different audiences. This way, if any single income stream is threatened, you'll have the others to serve as backups.</p><p>The same principle applies to you as an individual. You can diversify your income streams by investing in dividend-paying stocks, investing in real estate, starting independent blogs or websites, or even picking up side gigs. These don't have to provide full-time income; any additional cash you generate will be valuable for mitigating your personal financial risk.</p><p dir="ltr">There's no way to <a href="https://www.inc.com/brian-hamilton/three-ways-to-stay-on-top-of-financial-risk.html" dir="ltr">completely avoid personal financial risk</a> while starting a business. Risk is an inevitable part of the deal, but with the right strategies, you can mitigate your personal risks, assuage your concerns, and feel more confident starting your own enterprise.</p><div>Mar 3, 2022</div><figcaption class="caption">The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.</figcaption><div><span>Read Next</span></div>

The right strategies can help you minimize your personal financial exposure when starting a business.

Stashed ideas

<p>By contrast, if you start a limited liability company (LLC) or a corporation, you'll have at least some degree of liability protection. These business structures allow your business to be treated as if it were an individual of its own. The business itself can take out a loan, incurred debt, and be the target of costly lawsuits - reducing your personal exposure to these financial risks. </p>

<p>Just be aware that this doesn't grant you unlimited liability protection; it's still possible to take on personal debt and you can be legally responsible for actions of gross negligence in many scenarios. </p>

<p>New business owners are tempted to fund the business themselves, even if they don't have the savings to cover those expenses. They take out personal loans, max out their credit cards, or incur debt in other ways to get the money they need. A few minor expenses here and there won't hurt you, but for the most part, you should never take out personal loans. Instead, work with investors, tap into your savings, or <a href="https://www.experian.com/small-business/establish-business-credit">rely on your business credit </a>to take out loans in the business's name. </p>

<p>You'll be far less exposed to personal financial risk if you have a strong financial foundation. That means having ample savings do withstand volatile income changes as your business develops and reduce the impact of a total business collapse. </p>

<ul><li><b>Budgeting and frugality -  </b>Be smart with your budgeting and try to remain as frugal as possible. If you don't have much in the way of savings and your business is going to be your primary source of earnings, you need to live a modest lifestyle and focus on pocketing your extra income. </li><li><b>An emergency fund  </b>- It's also a good idea to put together a robust emergency fund. Set aside at least enough money to cover a few months of personal expenses. This way, if your business has a bad month or two, or if the business undergoes a total collapse, you can buy yourself enough time to properly respond. </li><li><b>Tax-advantaged investment vehicles -  </b>With any extra money, use tax advantage investment vehicles to maximize your savings and plan for retirement. For example, the Roth IRA in the United States can help you grow retirement savings tax-free, while the <a href="https://www.cstspark.ca/en/learning-centre/rate-of-return-in-RESP">RESP rate of return </a>in Canada can help you save for your children's college education. </li> </ul>

<p>Next, try to diversify your income streams, both inside the business and on a personal level. Within the business, that could mean selling multiple different types of products and services, monetizing your content or applications in different ways, or even targeting different audiences. This way, if any single income stream is threatened, you'll have the others to serve as backups. </p>

<p>The same principle applies to you as an individual. You can diversify your income streams by investing in dividend-paying stocks, investing in real estate, starting independent blogs or websites, or even picking up side gigs. These don't have to provide full-time income; any additional cash you generate will be valuable for mitigating your personal financial risk. </p>

<p>There's no way to <a href="https://www.inc.com/brian-hamilton/three-ways-to-stay-on-top-of-financial-risk.html">completely avoid personal financial risk </a>while starting a business. Risk is an inevitable part of the deal, but with the right strategies, you can mitigate your personal risks, assuage your concerns, and feel more confident starting your own enterprise. </p>

Bite-sized knowledge
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The 4 Most Important Ways for Entrepreneurs to Mitigate Personal Financial Risk

Establish an LLC (limited liability company) or a Corporation

Never Take Out Personal Loans

Focus On Independent Saving Strategies

Diversify Your Income Streams

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Bite-sized knowledgeto upgradeyour career

The 4 Most Important Ways for Entrepreneurs to Mitigate Personal Financial Risk

Establish an LLC (limited liability company) or a Corporation

Never Take Out Personal Loans

Focus On Independent Saving Strategies

Diversify Your Income Streams

IDEAS ABOUT

MORE LIKE THIS

Financial planning for Beginners - Top 10 Golden rules

Exploring Personal Budgets as A tool for Financial Freedom

12 Personal Finance Tips and Tricks to Make You Rich - Swift Salary

It's time to

READ

LIKE

A PRO!

Bite-sized knowledge
to upgrade
your career