Business ownership can be very rewarding — but it can also be risky. If you’re an entrepreneur pursuing your dreams and forging your own success, it’s important to put some safeguards in place to ensure that your business doesn’t upend your personal financial plan.

Choosing an Appropriate Business Structure

Your business’ legal structure can affect how much you pay in taxes, the amount of required paperwork, your personal liability and your ability to borrow money. If you will be the sole owner of your business, you have three primary options. You can operate the business as a sole proprietorship, form a limited liability company (LLC) or create a corporation.

You may find a sole proprietorship to be the simplest option, as a separate entity is not created. In this scenario, you can employ others, but you won’t be paid by the company yourself.

Unlike a sole proprietorship, an LLC is a separate legal entity. Some choose an LLC over a sole proprietorship because this structure may offer more protection of your personal assets if the business is sued. However, if you need to borrow capital, business lenders generally require personal guarantees from a small company’s owners, so you would likely still incur personal liability. As for federal taxes, an LLC’s income is taxed to the owners individually and earnings are subject to self-employment taxes.

A corporation is a completely separate legal entity that transacts all business operations in its own name, including borrowing money and filing federal income taxes.

While this decision is very important, know that it’s not set in stone — you can begin as a sole proprietor and convert to another structure if your needs change. It’s imperative that you seek professional tax and legal advice to weigh all your options carefully.

Valuing Your Business

Knowing the value of your business can help you access needed capital, inform your succession plan and protect your family from a large tax liability in the event of your death. If you were to die unexpectedly, and your business was worth more than expected, you may be leaving your family with a large tax bill. Armed with an independent valuation of your business, you may be able to use insurance or other strategies to ensure sufficient liquidity to handle any estate taxes. Contact a valuation professional, who can assess the value of your business based on an analysis of a variety of business and economic factors.

Protecting Your Business

Each business presents different risks and you should evaluate insurance options that protect against natural disasters, the sudden death of a key employee or other potential hazards. However, an absolute must for all businesses is professional or business liability coverage, which protects your business from acts of negligence in today’s litigious society.

• General liability insurance protects your business assets in the event of a lawsuit for something your business did (or didn’t do) that caused injury or property damage. Liability insurance covers claims such as bodily injury, property damage, personal injury and damage from slander or false advertising.

• Professional liability insurance, also known as errors and omissions insurance, is important if you’re in the business of giving advice, making recommendations, designing solutions or representing the needs of others. This type of coverage protects you against claims that something you did on a client’s behalf was incomplete or inadequate, cost your client money or caused harm in some way.

Creating a Succession Plan

Letting go of the business you’ve spent a lifetime building is a huge decision. It’s important to create a succession plan to ease the process of ownership transfer and ensure that you can achieve your retirement goals.

You may plan to transfer ownership to a family member or sell your interest to an outside party. Another option is to sell your ownership interest to your employees through an Employee Stock Ownership Plan (ESOP).

Whatever plan you choose, it should protect your company’s value and competitive position, minimize potential conflicts among family members or co-owners and create income for yourself. A succession plan can also be an effective tool to minimize your estate taxes if your company is public, as you can give your children up to $14,000 worth of company stock tax-free over several years, due to the federal gift-tax annual exclusion.

If you own a business, it’s likely that a majority of your net worth may be tied up in your business. Careful planning is essential to ensure you preserve and have access to your capital so you can meet your financial and retirement goals.

— By Erin Eddins

Erin Eddins is a Certified Financial Planner and Chartered Financial Consultant with Stancorp Investment Advisors in Lynnwood.