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No matter how small or insignificant your business is, there is risk. No matter how few your assets are, there are vulnerabilities. And no matter how careful you are with process and policy, there is liability. If you own a business, you can be sued, even if you’ve done nothing wrong. You may think there is no chance of that even happening, as I once did, but people can accuse you of something you had no part in, threaten you with a lawsuit and then file a lawsuit if you don’t quickly come up with what they feel is a fair settlement, what some may call extortion. While you’re thinking the whole time, “but I didn’t do anything wrong”, the suit is going forward and now you have to prepare yourself for months or even years of litigation.
I was recently at a workshop on Ethics geared towards those in the real estate industry, where the instructor expressed to the class, “lawsuits are not usually about who’s guilty in the wrongdoing, but who has the deepest pockets”. So for example, if a homeowner feels their home was not built to their specifications, they are not just going to sue the builder, but the architect, the realtor, the broker, the inspector, the builder’s contractors, the state inspectors and anyone else they can claim had a hand in their ‘pain and suffering’. So even though, most or none of the above parties did anything wrong, they are now going to have to spend thousands of dollars defending their innocence, and ultimately may be forced to settle for an additional thousands of dollars.
“Oftentimes I hear clients say, ‘We didn’t do anything wrong, why should we pay this person?’ The answer is that winning the case can cost a lot more than settling. You must make a calculation: Will the company be better off, financially, if it pays the plaintiff $20,000 than if it spends $30,000 to win the case? As the saying goes, ‘A bad settlement is often better than a good trial.’ “
– John R. O’Brien, a Chicago-based attorney.
Doesn’t sound fair? Welcome to the world of our legal system and our litigious society that we so bravely opened a business in the midst of. So instead of complaining and stomping our feet about the injustice in the world, let’s discuss a few main ways you can protect your business, it’s assets and your own personal assets.
File for an LLC
What is an LLC?
“A limited liability company (LLC) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is not a corporation under state law; it is a legal form of a company that provides limited liability to its owners in many jurisdictions. LLCs are well known for the flexibility that they provide to business owners; depending on the situation, an LLC may elect to use corporate tax rules instead of being treated as a partnership, and, under certain circumstances, LLCs may be organized as not-for-profit.”
*See your accountant for more details and fuller description.
Why do you need an LLC for your business, regardless of how small it is?
“Limited liability means that its owners, also called members, are usually not personally responsible for the LLC’s debts and lawsuits. If an LLC files for bankruptcy, the members do not have to use personal money to pay the company’s debts. If the LLC faces a lawsuit, the members do not risk losing their home to cover a settlement.”
So filing for an LLC is basically like erecting a wall around your personal assets, separating the value of your home, your savings, your retirement accounts, your cars and other personal property, etc., from your business’ assets. So if someone comes after you in the hopes to cash in because they have some legal complaint, they cannot touch your personal assets or net worth. And if things go truly south, and you are forced to go bankrupt due to the litigation (yes, it happens more than you know), then that bankruptcy will not affect your personal assets or credit history.
The protection provided by your LLC can be put into question if you are commingling business and personal funds. Therefore, make sure you have a separate bank account for your business, only deposit profits derived from the business into it and only pay business debts out of it. Make sure your business has checks printed with your company name (with the “LLC” denomination after that name) on it, and when paying the business owner(s), track the amount of income each owner is making through the year and pay the required payroll taxes for each. If a lawsuit arises, and bankruptcy is a potential risk, your attorneys will want to see proof of your LLC as well as proof that financials were kept in order and separate from personal assets.
How do you file for an LLC?
In most states, all you need to do is file Articles of Organization with your Secretary of State and pay the required filing fee. Depending on the state you live in, when filing for an LLC, you may or may not have to pay a franchise tax, you may need additional paperwork depending on your business structure, and you may not be allowed to file for an LLC depending on your industry. So this is where you need expert advice.
If you haven’t already, hire an accountant specific for your business accounting and tax filings. Choose one you can trust, one that has substantial experience, a wealth of positive feedback and who endeavors to honestly and accurately follow the laws of the land. An accountant will understand your state’s laws and help you navigate the process of filing for an LLC for your business.
Obtain GOOD INDUSTRY-SPECIFIC Insurance for your Business
This is not a lesson you want to learn the hard way, believe me! Having a business insurance policy is a good start but not nearly enough to protect your business. Choosing your insurance plan should take as much time and consideration and research and interviewing as it would to choose your office manager or accountant or the decision to open the business in the first place. Your insurance plan may be the only barrier between surviving a lawsuit (or other tragedy) to watching your business implode in a ball of fire. Do not take the decision lightly and know going in … that not all insurance companies, insurance plans and definitely not all insurance agents are the same.
Don’t choose your agent because he’s a friend of a friend, he’s got the biggest office in town, does the most commercials or even talks the best game. In any of those cases, RUN in the opposite direction because they see insurance as a money-making business not a service that protects real people’s and real business owners’ assets and livelihoods. When a business is destroyed because of insufficient insurance protection, there is a ripple effect in the community. Not only to the business owner, but to the employees, subcontractors, suppliers, customers and local tax income. A true, honest and trustworthy insurance agent will understand the responsibility he carries in protecting his clients and his community.
I chose poorly. I spent little time discussing my insurance needs with the agent, even less with his ‘office person’ who went through four or five questions over the phone, before they had me signed up with a policy I never read, understood or was assured how it would protect me. They spent more time in setting up my automatic bank withdrawals than ever discussing potential risks of my business. In fact, that never even came up. I thought I was protected because my agent knew me, knew my business well, especially since we had spent over a year together as members in a business networking group where we shared our elevator pitch at every weekly meeting!
When the time came to needing insurance protection, I realized quickly I was sold a product I could not use, that did not protect my business, it’s risks nor my assets. The insurance representative denied the claim before he even understood the claim, then denied it several more times at the appeal of my attorney. I was told by several attorneys that the insurance agent was negligent by not following the ‘good faith policy’ of Kentucky, since I was sold a policy that I could never use.
As they say, hindsight is 20-20, so instead of dwelling on past mistakes, let’s focus on how to learn and prevent future ones. When I replaced my insurance policy, I did research, interviewed several agents, asked questions and had the final policy reviewed by my attorney to ensure they were selling me a product I could use and would protect me in the future. I realized quickly, a reliable insurance agent takes time to meet with you in-person and spend a great deal of time asking questions about your business, your policies and potential risks. If they’re not asking questions, then they’re not protecting you as those questions protect their business as well as yours.
Good insurance is not cheap, there are no shortcuts to the process of selection, and make sure you pay an attorney to review the policy. Your attorney may suggest changes and alterations to the policy and plan, which mine did and ending up saving me money by removing redundant protections. Work with an insurance agent that is comfortable with an attorney reviewing your policy and willing to make needed changes. If you need suggestions on local agents, please email me.
There are so many risks to a small business these days that require various types of business insurance property insurance, worker’s compensation insurance, product liability insurance, vehicle insurance, professional liability insurance, cybersecurity insurance and business interruption insurance. Ask lots of questions, do a lot of research and hire an attorney to help you navigate the process.
Ensure you have Solid Business Contracts & Agreements
One of the golden rules in business is ‘get it in writing’. Never assume anything that is verbal or agreed with a handshake, we no longer live in that kind of world. Developing contracts is another daunting and time-consuming task that honestly is never truly complete but needs constant monitoring and revisions. Issues and conflicts will come up that you had not thought about before or honestly never imagined the ‘lows’ people will reach to make a buck. Each of these instances are an opportunity to learn, and a reason to rewrite or amend your contracts. I review my contracts once per year and make sure my attorney and a Human Resource Consultant reviews them as well. Why? Your contracts are another layer of protection for your business and impending lawsuits, conflicts, recalcitrant debtors, employee or contract disputes and so on.
If you don’t have contracts specific for employees, subcontractors, and clients, then hire an attorney before you attempt to draft them. A legal representative in your state will understand the laws, research the regulations in your specific industry and take time to explore the potentials risks you may face before writing up the contracts. It may not prevent future litigation but having a solid, signed contract between the parties may diffuse the long-term results and potentially reduce settlement costs.
As another precaution relating to contracts, don’t sign a contract with an employee, subcontractor, partner or any other business representative until they are fully vetted, interviewed, researched and who’ve you had extensive communication with about (1) current laws of your industry; (2) guidelines, regulations and policies of your particular company; and (3) marketing, branding and reputation policies that you want them to adhere to. Having those discussions prior to signing a contract may weed out those who you sense may not be a good fit for your company. If they represent your company, you want to ensure they are trustworthy to care out the lawful and company-specific regulations that are required for the position.
Without being redundant to the already covered topic of insurance, I was personally told by several parties including my new insurance agent, that any subcontractors you work with should be required to carry their own general liability insurance. Why? Because you can be held personally responsible for their actions, and/or you may be pulled into a lawsuit against the named subcontractor. Remember the example above, the plaintiff and their insurance company don’t care who’s guilty, they care who has the deepest pockets.
“How can you be sure your subcontractor is insured? First, require it in their contract. Second, ask to see proof of coverage, typically in the form of a Certificate of Insurance. It is also a good idea to require that your subcontractor name your company as an “Additional Insured” on their general liability policy. When you are an Additional Insured, your company is protected by the subcontractor’s policy, just as they are. That way, if you are sued as a result of damage the subcontractor causes, the subcontractor’s insurance company is required to cover your company for the claim.”
As the wise Benjamin Franklin said, “An ounce of prevention is worth of pound of cure.”
Taking the time and mental energy to make needed steps to protect your business will not only prevent large issues down the road, they will give you peace of mind so you can sleep better at night and work more creatively during the day. Instead of worrying about the what-ifs, hire trusted and credible professionals, an accountant, an attorney specializing in small business matters, an insurance agent and a human resource consultant (if you have employees and contractors).
“Great things are never done by one person, they’re done by a team of people.”– Steve Jobs
Be honest with yourself that you need help, professional help when it comes to protecting your business and its future. My situation is not unique and although I survived, I didn’t come through the ordeal without my own share of battle scars. But more importantly, I have learned a great deal and I plan to share these lessons with my clients and business associates to help sure up their own businesses and hopefully prevent just one entrepreneur from falling prey to the any unfortunate circumstances induced by extortioners, criminals, greedy vendors and disreputable contractors. Wishing you good health & continued success in your business!