If you have ever started a business, you know what it is like to wake up in the middle of the night and be worried sick. Being in business exposes you to a lot of risk. The key is to plan for risk and minimize it where possible, so that you can find the sleep you need to succeed.
Here are the ten most common strategies to minimize risk when operating a business:
1. Forming a Business Entity
The right business entity can shield your personal assets from creditors of the business.
The right business entity can also shield business assets from personal creditors of the owners of the business.
2. Removing Assets from the Business Entity
Since business assets are exposed to attack by creditors of the business, it is wise to remove as many assets as possible from the business entity, or not even put business assets into the entity in the first place. A combination of business entities, a regular withdrawal of business assets, and a smart funding of business entities with owner loans and liens can minimize the risk that important business assets are open to attack by creditors.
3. Hiring Independent Contractors instead of Employees
Employees can get business owners into trouble. Some of the liability issues are avoided by outsourcing business tasks to independent contractors.
4. Entering into Founder Agreements with your fellow Business Partners
Properly drafted founder agreements, such as shareholder agreements, operating agreements or partnership agreements can prevent sticky situations with co-owners and provide clear rules with respect to forced buyouts of owners, exist strategies for owners, vesting of owner equity and so forth.
5. Keeping your Books and Records in Order/Complying with Formalities
Co-mingling personal assets with business assets, neglecting to hold and document required corporate meetings, neglecting to properly document transfers of assets in and out of the business can be the death of any properly structured limited liability shield and asset protection strategy. Creditors who can show neglect in such respects may be able to pierce the corporate veil of the limited liability entity and reach your personal and business assets.
6. Solid Business Contracts
Business Contracts that properly spell out the deal you want, provide for dispute resolution mechanisms and identify the proper parties can prevent many misunderstandings and hassle with your customers and suppliers.
7. Using the Law to your Advantage
Getting proper protection for your intellectual property to the full extent of the law can prevent theft and infringement of such property by third parties.
8. Complying with the Law when raising Money
Being aware of and following state and federal securities laws and regulations when raising money can keep you out of serious (even criminal) trouble.
9. Assembling the Right Team to Look out for your Business
To paraphrase Seth Godin in How to Succeed in Business to Business, you need people who will be consistently on time, on budget and most importantly, people who don’t cause you to lose sleep. That your lawyers, accountants and other advisers are brilliant at what they do, should be a given.
10. Getting Insurance
Despite the best business entity structure, adviser teams and other strategies, there remain risks that can be insured. Even limited liability business entities have many
exceptions to the limited liability shield. A good business insurance broker can tell you about the risks that can be insured.
**This post is for informational purposes only and does not constitute legal advice**