Conducting Business – How to Protect Yourself and Your Family

Larry DonahueGeneral Liability, Insurance Agents

When you are running, managing and/or owning a business, you are under constant threat from all directions. It’s important to understand what those threats can be, and how to take proactive, cost-effective measures to minimize and reduce the risks to yourself, your personal wealth and your family.

There are a number of risks you need to concern yourself with:

  • Liability. This comes in many forms, but the biggest two are “personal liability”, where you are held personally liable for the harms, debts or obligations of the company, and “business liability”, where the liability stops at your business, and doesn’t extend to you personally. Under this general concept of “liability,” you have a number of areas of liability, including but not limited to:
    • Legal liability. If you (or an employee, contractor or other agent or assign, even against your advice or orders) manages to commit an illegal act, not obtain proper license, permit or registration, or fail to do something otherwise legally required (i.e. report an offense, for example) in furtherance of the business, you and/or your business can be held legally liability for such acts or inactions.
    • Financial Liability. Similarly, if you (or an employee, contractor or other agent or assign, even against your advice or orders) manages to hurt someone, cause damages or cause a financial loss, in furtherance of the business, you and your business will be held liable.
    • Tax Liability. Even if you rely on a third-party to calculate income and sales taxes, if they are incorrectly reported, you could have mounting penalties, interest and other charges that may not even be dischargeable in bankruptcy and could follow you to other business ventures under the legal theory of “successor liability.”
  • Theft & Loss. This concerns not just physical assets, such as equipment, vehicles or inventory, but less tangible and just as important assets of the company, including but not limited to credit card information, customer lists, trade secret information, recipes and more. Thefts can come from hackers or other strangers in the night, as well as trusted employees and contractors.
  • Harassment. It’s easy to overlook this, but in today’s polarized political environment, there are all sorts of businesses — aside from what you’d think of as being on the far-right or far-left of the political spectrum — that can become the subject of ire from certain segments of the population. For example, consider Corona Beer and read, Covid-19: Corona beers brunt of virus attack.
  • Fire and Other Catastrophic Losses. This goes beyond basic theft and loss, and relates to events that cause the complete destruction of your business and/or loss of life. Are you setup to recover — and meet next week’s payroll — from such an event?
  • Fluctuations in Business. Your revenues are like waves washing up on a beach. Some days, the waves can be tremendous, but at other times, calm. You need to operate and structure your business to withstand both types of conditions. If you have just a couple of clients that provide most of your revenues, you need to prepare your business for the eventuality of losing one of more of those key customers. Same goes for basic economics — how many non-essential businesses were ready to withstand the COVID-19 pandemic?

Don’t Be Scared, Just Be Prudent

I’m not trying to scare with you with the list of potential risks you face when starting a business, but I am trying to instill in you a sense of required prudence. Don’t just jump in with both feet. Take some precautions, and make sure you do things correctly — which can mean the difference from outrageous success and abject failure in just a few years from now.

Here are my recommendations every business leader should follow when starting a business, and if you’ve already established your business, review the list and ask yourself, “Have I done this?” If not, it’s never to late to add some prudence to your business.

1. Form a Company

When I say “Company,” I’m referring to a corporate entity. Think of it has having a child, who will “be the business.” It will be the child (i.e. the corporate entity, not you personally) that enters into contracts, forms relationships, obtains bank accounts and merchant accounts, and gets paid. The most popular type of entity is a limited liability company (or LLC). Corporations are another type, although not favored because they tend to be more expensive and complicated to setup, maintain and take down.

If you’re not sure what you want, try the Business Entity Selection Tool at our sister company, Law 4 Small Business (L4SB).

Forming your company should be one of the first things you do, because IT (i.e. the corporate entity, such as your LLC) will be the one obtaining social media accounts, leasing space, hiring contractors, etc. It’s not very expensive, but critical to helping you protect yourself and your family from all forms of liability mentioned above.

  • Need to protect your privacy? If so, then form an Anonymous LLC. This consists of an Operating Company formed in your home state (a Regular LLC), which is owned by an Anonymous LLC as a Holding Company. You own the Holding Company. In this way, your Operating Company is your business and not only helps protect you and your loved ones from liability issues, it also keeps your personal name from becoming public information and opening you and your family to harassment or worse.

2. Put in the Right Contracts

The right contracts are critical for businesses, and should be in place for all third-party relationships: Your client/customer, your employees and contractors, and all vendors, suppliers and agents.

Contracts shouldn’t just indicate that you need to pay money to someone. They should indicate when and how you pay. They should indicate under what circumstances you don’t have to pay, and most importantly, what are you expecting the other party to do — in a way that is specific, measurable and time-bound. In that way, if the other party doesn’t measure up, you have the ability to terminate the contract.

Other critical clauses include confidentiality, intellectual property, limited warranty, limitation of liability, dispute resolution and attorneys fees to the prevailing party. If this topic interests you, review the contract-related blog articles over at L4SB.

3. Become Friendly with an Accountant/CPA, Banker, Attorney and Insurance Agent.

These individuals can do more than keep you out of trouble — they can introduce you to others, including suppliers, strategic partners and key clients/customers.

Accountants/CPA’s are critical to help understand how to manage, keep track of, report and maintain financials and taxes.

Bankers are useful for access to money. Obtain a business line of credit now, when you don’t need it. A line of credit can help your business withstand financial fluctuations, and can provide critical money at a time when you may not otherwise have access to capital.

Attorneys are useful when dealing with third-parties. Attorneys are the least expensive, when you use them proactively — before you have trouble. Of course, attorneys are great at helping you get out of trouble when disputing with a third-party, but that’s also when they are the most expensive. Therefore, do yourself and your business a favor, by consulting with an attorney before you run into trouble.

Finally, a good insurance agent can help you understand what forms of insurance policies and coverages are required, and what are good to have. Must haves (i.e. General Liability and Workmans’ Comp) are obviously essential, but it often pays to understand the nice-to-have insurance policies, and make sure you have coverage in critical areas.

4. Obtain the Right Insurance Policies

As alluded to in the previous paragraph, there are some forms of insurance that are actually legally required. For example, if you have 3 or more employees in a business in New Mexico, including yourself and any contractors, you are required to have Workmans Comp insurance. Other states have similar requirements. If you are medical professional, you are required to have medical liability insurance in almost all states. If you are a contractor, you are required to have certain types of bonds and liability insurance in most states.

Insurance requirements, therefore, will vary tremendously depending on what you do, the size of your company, where it’s located, and its customers.

Therefore, if you haven’t yet, you owe it to yourself, your family and your business to talk to a competent insurance agent to learn more about what is required for your business and what your business does. This is why we put Insurance 4 Small Business together, insurance for your business.

Insurance 4 Small Business – Protect your business, your employees &  yourself.

Protect your business, your employees & yourself.

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