All small business owners are interested in protecting their business. They have put too much time, energy, and money into it to not be concerned about limiting potential risks. But, often potential issues, risks, or liabilities get overlooked because they aren’t front and center, and the old adage - “I’m not getting sued or anything, so what’s there to worry about?”
Well, it’s not always that straightforward. Most businesses have some underlying risks or liabilities they don’t recognize that get pushed to the side because they aren’t something anyone is focusing on. Usually, it’s not the area of expertise for anyone in the business and that’s understandable, especially as a business is getting started and moving into the growth stage. The problem is those issues just compound themselves as they go unmanaged. If contracts are unenforceable or open a business up to liability, it’s a much bigger risk when it goes from having three contracts to having 33. Or, if a company isn’t set up properly to limit the owners from personal liability, it’s a much bigger issue when the business is doing $1 million in sales than it is when the doors just opened and a sale hasn’t been made yet.
Because all businesses are inherently different, it’s hard to say what the right time is to start managing the legal and risk issues. However, the issues are not something that should be ignored for too long - they should be regularly looked at and evaluated. All concerns can be addressed and managed going forward to limit potential liability. Whatever the case, business owners should be cognizant of the fact that risks are unavoidable in business, but they don’t have to get burned and can manage them proactively.
Here are some steps small businesses can take to protect themselves (the sooner the better):
Make Sure You’ve Got the Right Entity Type. Business owners will want to choose the business entity that works best for them; sole proprietorship, partnership, LLC, and corporation are the common ones. There are tax implications, personal liability implications, and control considerations when setting this up so it’s important to pay attention or work with a lawyer. It also doesn’t necessarily matter how the business started out, if things have changed, update the entity to make sure it works.
Get A Buy/Sell. If the business is a partnership or has multiple owners think about how a situation where an owner wants out is going to be handled. It will be much easier to address this upfront than when the situation comes up and don’t worry if this wasn't in place when the business was started, it can be addressed down the road, but hopefully before a partner decides it’s time to leave.
Internal Documents In Place. These will vary depending on the specific business entity a company goes with, but generally, it’s making sure the bylaws (for corporations), operating agreement (for LLC’s), or partnership agreement (for partnerships) are in place to help limit personal liability and/or layout management of the business. Some of these apply even if the business only has a sole owner, just because a corporation or LLC is owned by a single member or shareholder doesn’t mean this step should be overlooked.
Set Up A Strategy. It doesn’t have to be an elaborate 25-page business plan with a full-on SWOT analysis and competitive analysis (most businesses intuitively know those things for a while in any case), but some sort of baseline strategy of what the business hopes to accomplish is the next 12 months can be very beneficial when it comes to identifying and managing potential risks. A business can take steps before hiring contractors or employees to reduce issues that come with workers, or if a new product or service will be rolled out, and what potential landmines can be addressed beforehand. That’s just two very general examples, but businesses can use legal management to drive their business forward and limit risks at the same time.
Recognize and Protect IP. Every business has some intellectual property (IP) - think trademarks, patents, copyrights, and trade secrets. These can be extremely valuable assets to a business, so it will be important to know how to identify IP when it’s created and then how to protect it going forward so the business can capitalize on it.
Manage Employees. Making sure to have the expectations and policies for employees laid out and updated regularly can save a lot of headaches, time, and money. Employees are one of the biggest risks that businesses face and getting everyone on the same page about conduct, roles, duties, and responsibilities can remove some of the guesswork while making the business run more efficiently.
Classify Contractors Correctly. Classifying workers as employees or independent contractors is and will continue to be an issue for small businesses. Lots of small businesses want to classify all their workers as independent contractors to avoid taxes, benefits, and other associated costs that come with employees, but it’s not that simple. There are rules and regulations about who can be classified as an independent contractor and how they can be managed. The penalties for failing to comply can be significant, so make sure to have a system in place to properly classify and manage independent contractors that's regularly reviewed and updated.
Have questions about how your business can proactively manage legal and risk concerns, or legal questions in general? Contact us for a free consultation.