The Early Years of a Business, Part 5: Mitigating Your Business’ Risks

This is the last post in a five-part series about the early years of a business formation.  To catch up, click here.

After you’ve selected your business entity, capitalized your business, purchased insurance for your business, and maybe even taken on some new employees, you will want to get into the mindset of identifying legal risks present in your business.  Often, your business risks can be minimized at little to no cost to you.

To begin the process of assessing your business risks, you will want to conduct an internal audit to help you identify those risks.  Many hear the word “audit” and believe it to be daunting and time-consuming; even so, an audit will be worth your time now in order to minimize risks and prioritize your business goals.

During an audit, here are the questions you are likely to come across in the process that will prompt the biggest red-flags:

  1. Is there a document for succession of ownership in the case of my death?
  2. Are my key employees prevented from using my business methodology against me in the future?
  3. Do I have an employee handbook that only contains provisions for the size of my business?
  4. Are the terms of my sales/services recorded in a written agreement with my customer that sufficiently limits my liability?
  5. Do I have written agreements for all installment purchases, financial leases, letters of credit, or other similar transactions?
  6. Do I have appropriate insurance coverage and limits for my business?
  7. Do I have legal counsel on all pending or threatened litigation, including claims brought by the business as well as against the business?

Business owners should put into place a system to help them identify their risks now and during future growth.  Knowledge of these risks can provide a great sense of comfort to the business owner. The business owner can either adopt a plan for mitigation of these risks, increase their business model to protect cash flows in the event of a risk, or simply accept the risk and carry on with their business.  Note: Any findings from your internal audits are protected by attorney-client privilege.

The Early Years of a Business, Part 4: Documenting New Hires

This post is the fourth in our series about the early years of a business formation.  Read more in parts One, Two, and Three.

Another step most small business owners take in the first few years is hiring employees or staffing with independent contractors.  All of these professional relationships should be documented through the following agreements, forms, and letters:

  • Employment Contract or Employment Offer Letter. This document should include information such as the job title, scheduled work days/hours, term (or length) of employment, compensation details, responsibilities, and termination conditions.
  • Required Employment Forms/Filings. Some of these forms are likely ones that you are familiar with: the W-4 form for employees (W-9 for contractors), I-9 Employment Eligibility Verification form, State Tax withholding form, and direct deposit form.  You can also run the candidate through E-Verify, a system that checks employment eligibility in the U.S.
  • Necessary Agreements and Policies. When staffing your business, you can begin protecting your business from the get-go by having your staff sign the following agreements: non-competition agreement, non-disclosure agreement, employee invention form, employee handbook with an acknowledgement form, drug and alcohol testing consent forms, job analysis forms (this may encompass responsibilities, goals, and performance evaluation criteria), employee equipment inventory list, confidentiality and security agreements.  Depending on your business type, this list may vary or lengthen to suit your needs.
  • Employee Benefits Documentation. If you offer benefits to your employees, you may need documentation of the following: health/life insurance, mobile phone plan, company vehicle lease, stock options, retirement plan, disability insurance, paid time off or vacation policies (this would also include paid holidays), sick leave, employee wellness perks (such as gym memberships), and tuition reimbursement for continuing education.
  • Personal Data Collection. You also need to gather your staff’s personal data and keep it updated with the following: emergency contacts, brief medical history or relevant impairments, and any food allergies or preferences if there is a company-funded lunch or related event.

Employees are the small business owner’s greatest asset, but they do not come without risks.  Start your employer-employee relationship out the right way through proper documentation.  It will mitigate your risk, and it will also help you get to know your staff and keep you on the same page.

The Early Years of a Business, Part 3: Insuring Your Business

This post is the third in a series we are bringing to you about the early years of a business formation.  If you are getting caught up, here is Part 1 and Part 2.

Since every small business has different needs, there is no longer a one-size-fits-all coverage out there; as such, you are sure to find a plan that truly suits your business’ unique needs.  Here are the categories and types of insurance that, depending on your business, would be invaluable for you to invest in:

  • Property Insurance. This would cover any physical damage or loss your business may suffer, from the building to the supplies and equipment you use.
  • Business Interruption Coverage. This would protect your business’ earnings in the event that you have to close your doors due to an incident. (Note: if you operate your business out of your home, do not assume that your homeowners insurance would cover this loss; check with your provider first.)
  • Commercial Vehicle Insurance. If your business uses vehicles regularly to operate (whether you own them or rent them), this is important coverage to have.
  • Life Insurance. If you work with one or more business partners, life insurance will cover the finances that need to be handled after the death of a partner.
  • Liability Insurance. There are three types of liability insurance, each suited for different business types:
  1. General Liability: covers injury, property damage, medical expenses, and lawsuits.
  2. Product Liability: covers safety issues related to the malfunctioning of a product.
  3. Professional Liability: covers small business owners who provide a service, in the event of malpractice or error.
  • Workers Compensation Insurance. It is possible that, if your business has employees, you have a legal obligation to purchase workers compensation and unemployment insurance; this is the case for any business in the state of Illinois.  You may also be required to have disability insurance to cover an employee’s sickness or injury outside of work.

Remember: Insurance is not just about protecting your business as it exists today, but also to protect your business in the future when it comes time for you to pass your business on to a successor.  As we pointed out in last week’s post: You should always be planning for growth and succession!