Tips for Minimizing Risk for your Small Business

It goes without saying that entrepreneurs are a special breed of risk-takers. After all, it takes true grit to put your money and your name behind a business that may take years to become profitable. The risks are even more pronounced for small businesses with limited resources. However, foresight and strategic planning can mitigate some of these risks.

Business Structure
Corporations, limited liability corporations and limited liability partnerships protect business owners from personal liability when business issues may arise. The paperwork and tax processing may be simpler for a sole proprietorship, but under that structure, the owner is personally liable for everything related to business operations.

Insurance as a Risk Management Strategy
Risks are inherent in any type of business. Accidents, errors and even plain bad luck can create major liabilities for small businesses. The savvy business owner will prepare for these possibilities and seek to shift the risk to insurers. However, this contingency should be well planned, because different aspects of the business require separate policies.

Small businesses should have policies covering property, liability and business interruption. Various business insurance products are available to cover different insurable situations. Three basic policies that small businesses should have are:

• Property insurance, which covers physical assets including all work sites, furnishings, equipment and all assets owned or leased by the business.
• Liability insurance, which provides coverage for injuries suffered by customers and workers while on the property, including damages caused by workers while on the client’s property.
• Business interruption insurance, which provides some financial relief should business operations be disrupted because of a fire, flood or other factors.

Moreover, the business environment is changing as technology opens up new ways to interface with customers. If your business has an online component, review your policies to make sure that coverage extends to liabilities that may arise as you do business on the Internet. For that matter, review your business insurance coverage periodically and especially after a major event such as an acquisition of new assets or expansion to a new location.

Contractual Indemnification from Partners and Suppliers
If your business involves distributing products sourced from a contractor or a third-party supplier, your memorandum of agreement should include contractual indemnification clauses, making the supplier liable for product defects and unforeseen legal issues that may arise. You can always ask your contractors to carry insurance that is intended for just this purpose.

Risk Analysis and Management Plan
Schedule an audit periodically to pinpoint areas of your operations that may be risky, and prepare a risk-benefit analysis. Determine the benefits of phasing out high-risk but low-reward operations.

Another approach to this sticky issue is to spread out the risk by creating a new organization that is independent of the main business, in order to tackle the risk-prone aspect. Creating different business entities as you expand will shield your business and limit your liability to only the site that is affected.

Outsourcing to a partner or a third party is also a viable option to separate risky operations from your core business.

Prudent Management of Financial Risks
Enterprise software applications that are capable of tracking, organizing and publishing information are widely available, so there is no excuse for sloppy record-keeping. Accurate and timely data help to keep businesses operating at peak efficiency. More importantly, accurate records minimize financial risks when you can track operating results in real time, minimize outstanding balances, and track payout and collection records. Credit risks can be identified and dealt with in line with your pre-established benchmarks, limiting your bad debt exposure.

Risks are part of doing business. Many small businesses have gained influence in their niche by embracing big risks. However, sensible entrepreneurs know that taking calculated risks involves planning, strategizing and getting help from qualified professionals.

Author:

Todd S. Unger Esq. is a seasoned IRS tax attorney based in New Jersey. His law firm is dedicated to helping individuals who are experiencing problems with the IRS.