Published Via 11Press: The U.S. Census Bureau analysis of federal tax documents reported more than 4 million new businesses registered in 2020. The pandemic devastated the job market, but many savvy entrepreneurs created opportunities. They saw gaps within the economy – fitness equipment, contactless food ordering, and educational technology – and did something with that.
Becoming an entrepreneur is undoubtedly an exciting venture. Still, it also comes with the responsibility of accurately understanding and managing risk. With more people contributing to the start-up boom, it’s worth examining actions that can prevent unnecessary and costly risks.
Below are 5 ways entrepreneurs can manage risk to protect business profits.
- Understanding Risk
To correctly manage risk, it’s essential to understand potential scenarios that can financially impact your business. People starting ventures aren’t risk-tolerant, but they become comfortable with it over time through proper planning.
Inherent in understanding potential scenarios that can financially bind you means that you know your business. For example, a trucking company understands the potential for accidents when drivers are responsible for traveling long distances. They may even make contingency plans if the product they are transporting becomes damaged or lost. Thinking through these scenarios can help you build contingency plans – considering Plan B as well as Plan C and D.
- Understanding Liability
Liability is an obligation one party owes to another. When one party is liable to another, it is usually through financial responsibility for the damages incurred. Legally speaking, there are three types of wrongful actions that can lead to legal liability: (1) an intentional wrongful action, (2) an accident caused by negligence, and (3) strict liability of defective products.
For example, suppose you created a product, and it entered the marketplace. In that case, there is an expectation that the product will work as intended and be free from defects. While you aren’t liable for everything that goes wrong in your business, it doesn’t stop people from trying. If someone is injured using the product, they could try to sue. This is true even if the consumer doesn’t necessarily meet legal standards for a consumer to successfully sue. Court proceedings are always a risk. A consumer who was injured may get creative, hoping to settle outside of court.
Even if you are diligent in creating your product, accidents are not always preventable. If you maintain a business property and a person falls on your property, you can also be potentially liable.
Besides property damage and slip and fall accidents, an entrepreneur should consider other types of liability, such as employee error, professional mistakes, slander, libel, and errors and omissions. Essentially, when a person’s life is negatively altered because of something your company has done, they can attempt to hold you liable by filing a lawsuit.
While it’s impossible to think of all the potential ways people can get hurt using your product or service, it’s best to account that things will go wrong. Knowing how to protect yourself and your corporation is essential.
- Business Structure and Liability
As far as the law is concerned, your business is a legal entity. That means it can be held liable for wrongdoing. It can also take advantage of tax exemptions. With the understanding that every business comes risk and liability, you can protect your assets from liabilities. Knowing how to balance the advantages of different corporate structures with the risks involved will help you make a better choice. As the company grows and your structural and financial needs shift, you can also change the type of classification for your business entity.
For example, a sole proprietorship gives you complete control over your business. Yet, it is not considered a separate business entity. That means that your business assets and liabilities are not separate from your personal ones. You can be personally liable for your business. In contrast, an LLC ensures that your personal assets are safe in the event of a business lawsuit or debt. However, an LLC doesn’t allow you to take advantage of an S-corp’s tax savings. Every business should consider how structure can help manage liability.
- You Need Insurance
Even with due diligence, you may not be able to prevent a lawsuit. Insurance is an excellent contingency plan to help offset the expense when accidents occur.
Although it comes with a premium, insurance companies can offset financial obligations in a personal injury suit. For example, in June, Google reported Two Driverless Car Accidents in California. Even though the vehicles were reported to be traveling at low speeds, Google remains at risk of any damage. Injuries are not always apparent at the scene, and Orange County car insurance attorneys can assess the consequences, including injuries, medical expenses, and property damage. Having an insurance company can help determine blame and lessen liability.
- Types of Coverage Options
All businesses should carefully consider liability risks and discuss them with insurance agents. Agents are in a better position to understand the inherent dangers since they process claims. They can offer a variety of insurance options, such as:
- Property insurance
- Casualty insurance
- Life insurance
- Worker’s compensation
- Bonding
Every business is different, and therefore the options may change. Consulting with a business attorney is also an excellent way to mitigate risk and liability.
