How to Minimize Risk When Starting a Business
Do Business the Right Way
The sheer number of potential business risks out there can be overwhelming. From litigation to natural disasters and failed marketing ventures to under-performing employees, there are many areas in which something could go horribly wrong for your business. Worse yet, many of these issues can’t actually be prevented—you can’t exactly stop a hurricane from knocking out power. The good news, however, is that a combination of prevention and preparation efforts can greatly minimize many business risks—or at least mitigate the fallout.
As you can see below, for each of the biggest areas of risk, there are steps you can take to reduce the potential for disaster.
Areas of Risk to Minimize
If you’re unlucky enough to end up with creditors knocking on your door, it’s important to have some degree of protection that will keep you from losing your house and car along with your business. A key way to protect your personal assets is by choosing a business entity that limits personal liability.
In a sole proprietorship or general partnership, you essentially are your business. If someone sues your business, they are suing you—so all of your personal assets are on the table if you incur business debt. When you form an LLC or corporation, however, there’s more separation between you and your business. Typically, the debts and liabilities of the business are limited to the business itself. There are other business types (such as LPs, LLPs and LLLPs) that offer more restricted degrees of limited liability as well. While business types that offer these protections are typically more expensive to start and maintain than a sole proprietorship or general partnership, the payoff is limited personal liability in the event of a worst-case scenario.
Adequate insurance coverage—such as property insurance, professional liability insurance, product liability insurance and workers’ compensation insurance—can also help protect you in the event of a lawsuit or other disaster. Depending on the nature of your business, your company may benefit from specific insurance as well. For instance, if you regularly take expensive tools from work site to work site, are you insured against theft? Is there someone in your business who is absolutely essential to operations—if so, do you have key person insurance? If you’re not sure where to start, set up a meeting to discuss the nature of your work with an agent or broker specializing in business insurance.
If there’s more than one person in your business, you should absolutely have some sort of written agreement that is signed by each owner. Corporations should have bylaws, LLCs should have operating agreements and partnerships should have partner agreements. These documents explain what happens if there’s a dispute, what happens if an owner wants to leave and more. Making these difficult decisions when you first start your business (and while everyone still likes one another) can help prevent future arguments, wasted time, and even potential lawsuits.
Security and protection
You may also want to take steps to protect your intellectual property. If your business is centered around a unique product or process you’ve developed, you can apply for a patent. If you have a particular design or expression that you use to identify and market your business, you can apply for a trademark or service mark.
Understanding your compliance obligations—and staying on top of due dates—can help ensure your business doesn’t suffer from expensive penalties, loss of good standing, or even the dissolution of the business itself. If you have an incorporated business like an LLC or corporation, you likely have to file regular state reports. Your city, county or state may also have license or permit requirements that must be regularly renewed. And of course, there’s both federal and local taxes.
Note that federal tax due dates differ depending on what kind of business you have. For instance, the IRS requires returns from businesses taxed partnerships and S corps a full month earlier than businesses taxed as regular corporations or sole proprietorships. If you expect to have a tax liability of more than a few hundred dollars, you’ll likely need to pay quarterly estimated taxes as well. States also vary a great deal when it comes to sales and use taxes, so you’ll want to be sure you understand when payments are due.
Cash flow and expenses
In general, it’s important to know what’s happening with your money on a regular basis. What do your revenue and profits look like on a monthly basis? A weekly basis? How does incoming money compare to outgoing money? When you closely monitor your money, it will prevent unpaid invoices from piling up, and it will allow you to make adjustments (such as bill due dates or pay dates) that work best with your cash flow.
Also, it’s a good idea to regularly review expenses for areas in which you can save. Know that you don’t always have to pay sticker price or renew a contract at a previous rate. Some vendors and contractors offer rates with the expectation that businesses will haggle a little, so there’s often room to negotiate.
An error new businesses often make is trying to expand too quickly. Many projects and products means money is going in a lot of different directions. It also means each project or product is likely receiving less individual attention. It’s typically better to focus on a few projects or products at a time. This way, you can take the time to fully research the market, perform adequate quality control, and test new marketing campaigns.
It’s also a good idea to take your time when expanding to new states as well. For every new state you begin doing business in, you’ll need to register with the state, a process called “foreign qualification.” In addition to the initial foreign qualification fees, states typically require annual compliance fees and reports as well. You may need additional business licenses and permits too. Paperwork and fees can quickly pile up if you try to work in multiple states at once.
Product or service interruptions
Sometimes, there’s a sudden change in the price or availability of resources. While you can’t control these sorts of cost fluctuations, it’s a good idea to account for this possibility when initially pricing your product or service. It’s also important to have a list of alternative sources in your back pocket—another vendor may be able to offer a better price, even if the price of a good in general is rising. It’s also a good idea to build as much of a cash cushion as you can in case you need time to develop a more long term strategy to respond to changes.
It’s essential to stay on top of your reputation, particularly your virtual presence. If you get a review—good or bad—respond to it quickly and professionally. As unjust and malicious as a negative comment might be, don’t be tempted to unleash anger or accusation in your response. If there was a problem with your product or service, express a desire to make things right. Think of reviews as your opportunity to take charge of the narrative of your business.
Employees are crucial once you grow beyond the point of doing everything yourself—however, they also bring with them loads of potential risk. First, there’s a lot of compliance—you’ll need to follow federal and state laws regarding hiring, pay rates, insurance, withholding, workplace safety and more (or else face potential penalties or lawsuits). You’ll almost certainly want to develop an employee handbook as well, including policies for responding to performance issues. Taking the time to develop clear rules and expectations, strong leadership and a positive company culture goes a long way to keeping employees happy and successful.
That said, employees will inevitably leave or become unable to work at times, so you’ll want to develop a short-term emergency plan to cover basic operations in these situations. Cross-training employees can help ensure that the company can continue functioning when there are staffing changes or interruptions. For exiting employees, you’ll want to ensure accesses—from codes and keys to emails and passwords—are removed as well.
Ready to start your business?
Business is inherently risky, and there’s no way to avoid risks entirely. Generally speaking, there are many factors outside of your general control. However, this doesn’t mean you have to wait for disaster to strike before you weather or respond to the storm. With appropriate preparation, prevention and contingency plans, your business can reduce risk overall—and reduce the impact of issues that do arise.
Ready to start a new LLC or corporation? Northwest can help. We form businesses daily, provide expert registered agent service, and much more.