Many entrepreneurs start a business from a single brilliant idea. As that idea is put into motion, the company grows. But along with that growth comes risk.
There are over 33 million small businesses in the United States, according to the Small Business Administration. The owners of these businesses face many risks. Would you be prepared if a disaster struck?
You may initially think you are, but there’s a good chance your business isn’t fully protected from loss. Regularly assessing your risks and modifying your plans can help you safeguard your business and stay nimble in the face of evolving threats.
Select a business entity carefully
Say you start a business with a specific business entity in mind, such as a sole proprietorship. But as your business expands, this structure may no longer fit your needs. Periodically, ask yourself if your business entity setup is still relevant, and whether you need to evolve. Thinking through this question will help minimize your risk.
Many business structure options exist, such as limited liability corporations, limited liability partnerships, general partnerships, S-corporations, and C-corporations. Every option has pros and cons, and whether an option is relevant for your business will depend largely on your circumstances.
Selecting the right structure allows you to create a wall between your personal assets and your business. This is critical when considering your exposure. Speak with an attorney to discuss the details of your business and which business entity is the best fit.
Hold your personal assets carefully
Hold your personal assets strategically to keep them safe. Most business owners hope they’ll never face a lawsuit or another situation that could threaten their assets, but it’s important to consider this risk.
For example, you might decide to invest in a trust or keep some assets in the name of a spouse or child. For smaller businesses, it’s best to keep separate bank accounts for business and personal expenses.
Keep track of your credit
Your personal credit may intersect with your business credit, depending on your business structure. This is a good reason to carefully consider the various entity structures and which is right for your situation.
For example, operating your business through a specific entity type may help keep losses and liabilities away from your personal balance sheet and off your credit report. At times, business loans, including business credit cards, may require a personal guarantee. This means you’re personally liable for any debt incurred on the account.
Consider a business owner policy
A business owner policy combines three essential insurance coverages for your small business:
- Business property insurance for the location you rent or own and any property like tools, equipment, or inventory
- General liability insurance for the cost of property damage, bodily injury or advertising claims
- Business income (interruption) insurance for lost income if you can’t operate due to a covered event, such as a fire or theft
Think outside the box in terms of professional liability
Doctors, lawyers, accountants, and other professionals aren’t the only ones who need professional liability insurance. Anyone who has a special skill or knowledge is considered a professional and could be at risk for a lawsuit alleging malpractice or negligence. For example, wedding planners and hairstylists have faced lawsuits even though most of these businesses don’t think they need professional liability insurance.
Additionally, if you expand to start a business in a new industry, check with your insurance professional. They can help make sure your existing policy extends to the new business.
Plan for business interruptions
A fire, a hurricane or another event can bring your business to a halt. For these and other unexpected events, business interruption insurance is essential. If you suffer a covered event, it will step in to assist with expenses.
Without business interruption insurance, such an event could put your business in jeopardy. For small businesses, this could mean tapping into your personal savings to keep operations flowing and pay employee wages.
Since business interruption insurance only kicks in for a covered event, talk to your insurance professional about adding flood, earthquake, and sewer backup coverage to your policy. Just a few inches of water can cause tens of thousands of dollars in damage. (And you won’t be covered if you don’t have flood or sewer backup insurance.)
When estimating your business income coverage limits, use the annual gross earnings listed on your business financial records.
The bottom line
You’re passionate about your company’s future. One way to ensure it continues to thrive is to stay ahead of the risks. If you need help understanding your business’s risks, arrange a meeting with your insurance professional for sound advice.