BUS 212 RM&I I Spring 2006 copyright, SJH Minimizing the Risk of Operating a Small Business Through Risk Management… …and next week: Insurance

Business & Risk  Every business venture is risky.  We take risks, starting a business, investing our time, money and reputation.  Often times the higher the risk, the higher the reward.  The questions we need to ask ourselves include how much risk are we willing to take on? Are we willing to lose money, our homes, our assets, our business?

Risk Management: Asking the What IF Questions Risk Management is the identification of all exposure to financial loss of your business. It includes the selection of techniques to manage those exposures. No one knows your business better than you. It is up to you to ask yourself, the difficult “what if” questions: What if the firm burns down? What if my employee gets hurt? What if I get sued?

Insuring Strategies for Small Business As a business owner you can:  Assume the risk  Self insure  Avoid the risk ( don’t go into a high- liability business )  Transfer the risk  Reduce the risk - Educate Employees - Practice Safe Business Practices

Assume the Risk Let’s Face It!…most entrepreneurs don’t get insurance, because they don’t have the money when they first start. Many business owner’s choose to TAKE A CHANCE, that they won’t get sued. Your probability of being sued in the first few months of business is lower.

Self Insurance  Create your “own insurance company.”  Set- aside a “slush fund” or a “self-funded” plan.  Some small businesses will put aside 2% of gross profits.  Many small business owner’s will take this course for employee health insurance.  The disadvantage is it may not cover the claims.  The advantage is you have control over the cost.

Transfer The Risk  Push the liability on to the customer or client…  It helps create an awareness for the customer to be more cautious.  This is common practice for many service businesses: theme parks, health clubs, cruise lines.  Of course, you can still be sued.

Educating Employees to Safety on the Job oEducating your employees to safety issues can help reduce the risk of accidents and injuries and discrimination oMany larger businesses are required to have safety protocol training ( because it lowers the insurance premiums ) oCommon Training: Sexual Harrassment Ergonomics Product Handling

Choosing a Legal Structure The First Step in Covering Your Assets One of the most important decisions you can make is how to legally structure your business. One of the primary considerations is the amount of personal liability you could incur as a small business owner. Liability is a RISKY for a business. As a sole proprietor or partnership, you are your business, and this means, unlimited liability.

Sole Proprietors & Partners: Unlimited Liability  Although being a Sole Proprietor has some tax and other advantages, you are still assuming risk and potential liability.  What does unlimited liability mean?  You and your partners are responsible for the full amount of business debt, which could exceed your investment.  This “unlimited liability” means that all your personal assets are at risk, if you should default or be sued. This liability extends to your personal assets (ex: home).

How can you Avoid the Risks of Unlimited Liability  Consider incorporating your business if you are concerned about losing your personal assets.  For many industries it is STANDARD protocol to incorporate as a “C” corporation, an “S” corporation or an LLC.  Industries and businesses that “assume” more risk are those in construction, day care or those that work with heavy equipment, and those businesses with many employees.

Corporations & Limited Liability Companies (LLC s )  Protection from personal liability is the main advantage of a Corporation or a Limited Liabililty Company ( LLC ).  As a corporate entity your business is a “separate entity”; so shareholders are liable only for the amount they have invested ( not their personal assets ).

To Incorporate or Not? Consider the amount of assets you have to lose. Consider the industry standard for your business. Consider the size and potential growth of your business. Consider the tax and government regulations for corporations. Consider your own risk level. Consider other methods of “covering your assets” and minimizing your risks.

Risks: Controllable or Non- Controllable It is important to first analyze what risks are controllable, and what are not. Controllable. really means that the financial impact can be minimize SHOULD something happen.

Risk Controlled or More Profits Taking a calculated risk means less coverage, and therefore less premiums, which boils down to more profits for the business. Take into consideration: your risk level, and the industry standards.