Step 5 – Entities, Insurance, and Risk Reduction

Business Planning Start-Up Guide

We live in a world where lawyers and plaintiff use the legal system to steal from one another or ruin people and businesses without conscious.  These evil people use terms like “justice” or “fairness” or “equity” to excuse their actions.  

In some instances, a lawsuit is justified, but there are just too many opportunists who use the legal system for nefarious purposes.  Take steps now to preempt risk.


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Business entity: It’s really not that hard.

 

Risk Reduction

Risk reduction and and prevention are critical strategies for every start-up company.

Our state and Federal legislatures have created legal entities to help gather investors together, stimulate certain sectors of the economy, and partition business assets from one’s personal assets.  A prudent businessman or woman will take advantage of this unique gift.  We get few gifts in business, take advantage of this one.

Your first consideration should be to adopting a legal entity, like a Limited Liability Company (LLC) or a corporation.  Your second consideration should be liability insurance.

Legal Entities

Legal entities were first designed to help bring together investors and partners.  Unlike sole proprietors and partnerships, legal entities can outlive their original investors or stockholders, as well.  Inherent to entities, is their ability to erect partitions between personal and business assets.  Corporations were the first “legal persons” created.  Later, General Partnerships, Limited Liability Companies, and others were created.

In many states, such as Idaho, the legislature made creating an LLC inexpensive and easy.  In other states like California and New York, they made it a little more complicated and costly.  In any instance, this is something (in my opinion) one cannot be put off until a later date.  In Idaho, all one has to do is complete a very simple one-page form and pay $100 to file an LLC.  In California and New York, it may take an attorney.

In Idaho, the LLC statute sets up a default structure and if one reads it (it’s actually not that long), one can adapt their LLC to their needs.  However, if there are legal reason for each change, it may be to your advantage to get proper legal advice.  For the do-it-yourself-er, one can use canned operating agreements on services like Legal Zoom.  But be cautioned, one size agreements do not fit all state laws or circumstances.

There are a variety of reasons one would chose an LLC over a corporation and vise versa.  I wrote an article about different entities (it’s not legal advice).  It can be found in the Special Reports section.  I recommend reading, Even Superman Need A Business Entity.  This will be a good primer of what’s available.

It most instances, it is worth the cost to consult with an accountant and attorney to find the entity that’s best suited for your legal protection, tax position, and risk requirements.  Certain entities can change your tax bill, so a good tax attorney or accountant has the potential to save you money.

Remember, the more you save on taxes, the more you can reinvest into your company for growth; and later on, the better life you, your family, and those you help (charity, church, etc.) will have.  It’s all about keeping as much as you can:  you can put your money to better use than any bureaucrat or politician.

I hope they have insurance!

I hope they have insurance!

 

Insurance

When someone sues you, they’re looking to be “made whole” by the law.  That generally means money.  Even a simple law suit can cost between $50,000 to $100,000; and, in the end, the only one to  be “made whole” are the attorneys; if there’s any money left, the plaintiff may be compensated.

Umbrella Policy

A good liability insurance policy with an umbrella rider (or separate policy) can be worth the few hundred dollars in premiums you pay per year.  I used be a licensed agent.  It’s a good idea to shop around and read the policies.  Get three to five different policy quotes and compare them with price and coverage.

Vehicle, Property, and Errors and Omissions Insurance

If you use a vehicle in business or operate from your home or a separate office, don’t forget to get liability and other insurance coverage for your vehicles and business.  It’s a good idea for some personal-service professionals, such as real estate agents, medical professions, and engineering to have errors and omissions insurance.

Risk Prevention

Having entities and insurance is about risks reduction associated with the legal matters.  Though it may be useful to operate under a corporation and have an umbrella policy, you can do more to avoid legal issues.

Maintenance and Training

If you operate equipment, ensure equipment guards and training are in place to prevent injuries.  If you have real property, keep it maintained to prevent trips, falls, and other injury.  Good maintenance will prevent costly damage from water, ice, and fire damage.  Finally, keep good maintenance and training records.  Good documentation can prevent or reduce fines and lawsuits.

Be Cordiel and Congenial

In business, one may engage in heated customer or supplier discussions.  Being polite, giving an apology, and a speaking with calm demeanor will prevent a lot of legal problems.  I know a friend that once told a competitor, “Go ahead and sue me!”  After spending $30,000 to 40,000 (each) in court and attorney fees, they settled the mater in court ordered mediation, a few weeks before the case went to trial.  In the end, it was something both parties should have done in the first place.

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