Natural disasters are probably the last thing a small business owner wants to think about. But they happen. And a failure to prepare can wipe out the business. In fact, according to Labor Department estimates, 40 percent of businesses hit by natural disasters never reopen. You can’t prevent natural disasters from happening. But there are some things you can do to increase the chances of your small business surviving.
One is to establish a plan for how to deal with natural disasters. The plan should include some obvious actions, like having adequate insurance, buying a generator, backing up your computer files, and so on. But there are less obvious steps you can take too, ones that have to do with how you organize and operate the business.
Below are four steps to consider before a natural disaster strikes:
1. Incorporate or form an LLC
Natural disasters can result in huge losses for a business. If you own your business as a sole proprietor or in partnership with others you are responsible for the losses that aren’t covered by insurance. But if a corporation or LLC owns the business your personal assets are protected.
2. Prepare for disaster contingencies in your governing documents
You can provide for certain issues in your operating agreement or shareholders’ agreement. Issues such as who will run the business if a key decision-maker becomes incapacitated, who will be the registered agent if the person who was the registered agent can’t do it anymore, whether additional contributions will be required if the business has to close for a while, or whether to keep an emergency fund just in case disaster strikes.
3. Make sure the corporation or LLC Is in good standing
A business that is seeking bank loans or investors to help rebuild may be asked to prove that it is still in good standing as a corporation or LLC. It can only add to your stress to have to file back annual reports and pay back taxes, not to mention the financial strain of the penalties and interest, in order to be restored to good standing. And the last thing you need is to find out your company was administratively dissolved due to non-compliance, which can threaten your limited liability. Better to comply with these state requirements all along. And remember that even after a disaster hits, the business still has to file its annual report, pay franchise taxes, and maintain a registered agent and office to stay in good standing. With everything else going on these are things that might be overlooked.
4. Update the secretary of state’s records if you have to relocate
Many small businesses operate out of a single location. So one of the consequences of a natural disaster is that you have to relocate. If so, make sure to update the state records so they show the new location. A new principal place of business may require a filing to update the formation document, business licenses, assumed name certificates, or other records. It is particularly important to remember to update the address of your registered agent if that changed. A failure to do so can lead to administrative penalties and default judgments if the business is sued.
Conclusion
As we have witnessed, hurricanes, floods, earthquakes, and other natural disasters can have a devastating effect on small businesses and their owners. And in particular small businesses and owners who are not prepared. While you can’t fight Mother Nature there are things you can do to lessen the consequences of her wrath, including some steps related to business entity compliance. Another step would be to utilize a corporate service company to assist with the burdens of compliance and provide additional peace of mind.
By taking these preemptive measures you can focus on recovering from the disaster and getting your business back up and running.