Starting and running a small business brings both rewards and risks. Financial, legal, and cyber threats are among the challenges that, if mishandled, can lead to significant costs and potentially the downfall of your business.
In this article, we explore risks that could impact operations and outline seven strategies you can take to minimize or prevent them.
1. Choose the right business structure
Most business owners operate their company as a sole proprietorship or partnership, due to the ease of starting and administering these business structures. However, while easy, they may not be the best structure for protecting your business against risk.
For instance, the personal assets of sole proprietors and partnerships are not shielded from any liabilities of the business. If a customer or vendor sues you or demands repayment of a debt, they can come after your personal assets, such as your home or personal savings.
One way to protect your personal interests against these risks is to form a limited liability company (LLC). An LLC is a business entity that exists separately from its owner(s). As such, it is responsible for its own rights, responsibilities, and liabilities.
As the owner of an LLC, you have limited liability. Typically, your personal assets can’t be used to satisfy the debts or obligations of the business. However, an LLC does have its limitations. If you commit fraud or “pierce the corporate veil” (more on that below), you may be held liable for the actions of the LLC and vice versa.
Other business structures, including a C corporation or S corporation also provide strong protection to its owners from personal liability.
For more information, see How does an LLC help with personal asset protection?
2. Keep business and personal activities separate
When you structure your business as an LLC or corporation, business law requires that you separate your business and personal finances. If not, you may risk “piercing the corporate veil,” a term used to describe the removal of an LLC’s liability protection. When the veil is pierced, your business’ creditors can come after your personal assets.
Aside from maintaining the veil of protection that an LLC affords, keeping your personal and business finances separate has other advantages. A separate business bank account and credit card can help you better monitor cash flow and your company’s financial health and makes bookkeeping easier. It also helps you establish your business as a separate entity and allows you to build business credit – a must when applying for a business loan or even forming relationships with new vendors.
For more information, see How to avoid piercing the corporate veil.
3. Have an information and cybersecurity plan
Whatever your IT strategy – whether it involves a single laptop with one email account or a more comprehensive enterprise IT with CRM, marketing automation, and cloud services – cybersecurity must be part of it.
Small businesses frequently find themselves in the crosshairs of cyber attackers because they lack the sophisticated controls that larger enterprises implement. And all too often, a cyber breach can result in business downtime, reputational damage, loss of business, and even litigation.
Cyber risk aside, continuity of operations is also critical during times of disaster, such as hurricane or fire.
Take action to understand your business’ vulnerabilities and potential liabilities. Have a plan to continually back up company data and store it securely. Then establish a cybersecurity policy that outlines best practices for ensuring the security of company, employee, and customer data. Your plan should also include an incident response plan in the event of a breach.
Check out this one page Cybersecurity Tip Sheet and a CyberPlanner resource from the FCC that allows you to create your own custom planning guide.
4. Obtain necessary insurance
Another way to minimize risk is to get the right insurance for your business. While LLC protection is critical, it only goes so far, such as protecting your personal assets from a lawsuit.
Business insurance can serve as a safety net, protecting both your business and personal assets against unexpected events, such as accidents, natural disasters, and lawsuits that could cripple your business.
There are cases where certain types of business insurance is mandated by law. For instance, federal regulations require all businesses with employees to obtain workers’ compensation, unemployment, and disability insurance.
5. Register a trademark
A trademark can protect your business from brand or name infringement. Registering a trademark also protects your business from potential litigation (for instance, if you unknowingly use a name that is already trademarked, you could be sued. The registration process will help you discover whether a name is free to use).
For more information, see What is a trademark?
6. Maintain written agreements and records
In the event of a dispute with a vendor, customer, or employee, a written agreement can help you avoid a lawsuit. A lawyer can advise you on the contracts you should establish and with whom, such as employment contracts and supplier agreements.
Keep good records of these contracts, agreements, and what they cover. Always get business agreements in writing and include them in your records management system.
7. Maintain business compliance
Once your form an LLC or corporation, you must maintain its good standing status with the state where your entity was formed. Good standing requirements vary by state, but generally involve filing annual reports in a timely manner, paying franchise taxes, having the required business licenses and maintaining a registered agent.
Maintaining your business’ good standing helps to preserve your LLC’s limited liability protections, expand seamlessly into other states, quickly obtain a “Certificate of Good Standing” as required by lenders, and avoid potential state fees and penalties.
Maintaining business compliance can be costly. Be sure to research requirements for annual filings and franchise taxes before you start your business so you can budget accordingly.
In addition, while not required for an LLC, it’s best to create and maintain an LLC operating agreement, issue membership shares, record membership interest transfers, and hold annual meetings of members/owners and managers (if your LLC is multi-managed).
BizFilings can help
BizFilings can help you create your LLC online in three easy steps. We’ve helped over 500,000 companies start an LLC. We guide you through the steps and make sure the process is done right.
But we don’t stop there, our experienced team, comprehensive services, and exceptional value is with you through the life of your business, whatever your LLC needs we can help, including fulfilling your state’s legal requirements with our Registered Agent Services, and Annual Report and Franchise Tax Filings managed service.
