I meet with a wide variety of business owners from all kinds of industries. Do I have a favorite type of business that I like to work with?  Yes and No. No in the sense that I don’t care about what sector they are in; I don’t care what they do. What interests me are the new and emerging businesses that are at a crucial stage of growth as they encounter their first basic decisions on how to run a successful business. Even small businesses that are up and running can suddenly face unforeseen challenges that threaten their operation. All of these problems along with anything else that could cause a downturn in growth fall into the category of business risks. My focus as a business attorney is to provide solutions to these problems, and prudent counsel to protect against future risks. My objective is to help businesses overcome these obstacles and become successful.

Risk

The one thing that all businesses have in common is that every single one of them carries a certain amount of risk – whether they see it or not.  My job is to watch for it and help business owners manage and reduce it.  The only way to avoid business risk is to stay out of business.  Otherwise, there will be some level of risk no matter what you do. A trained eye can spot risks not obvious to emerging entrepreneurs. The instruments and strategies to deal with these problems can come from the financial world or the legal realm.

Reducing risk increases your chance of success in business, so I’d like to present some practical and cost-effective ways to help you do just that.

How do you define success?

Business owners are as different as their businesses. The goals they hope to reach can be just as varied. Success to many business owners means making good profits. Their twin calculus is as simple as maximizing income and minimizing expenses. But increasingly the definition of success for many owners amounts to more than just making money. A successful business is one that provides well-being and a good life for themselves and their families. It also means having a balanced life, so that not every spare moment at home is spent worrying about your business. You don’t want to stay up at night worrying about your partners or your customers or your employees. And you don’t want that nightmare where some shopper slips on a banana peel in an aisle at your store.

No matter what success means to you, working to spot and reduce risks is a practical and time-honored way to move toward success.

A No-Risk Business?

I met a business owner at a legal clinic who had come in for general business and legal advice. She was a sole proprietor who made mittens to sell online and at art festivals. When she asked what risks she faced, nothing seemed obvious as far as production was concerned. She had no employees to give her problems. Her supply chain was pretty safe – running to the fabric store to buy yarn.  She had no bricks and mortar location where someone could slip on a banana peel. How could making and selling mittens on such a small scale create any risk?

Nevertheless, from a legal perspective, I could see quite clearly the risks she faced, and also how to mitigate those risks.

Liability shield protections

The legislators of every state craft nifty laws that allow businesses to operate as corporate entities rather than as an individual person. If properly obtained and correctly operated, an entity like a corporation, LLC, limited partnership, or public benefit corporation creates a liability shield between the person and the business.  For not much money, you can take advantage of that protection by forming the appropriate entity. Not all entities are the same. Each has different attributes that give it certain advantages and disadvantages.

The first thing I advised the mitten-maker to do was to quit being a sole proprietor. Sole proprietors have no liability protection between their personal assets and their business assets. This means that lawsuits or judgments won by a plaintiff pass right through the business and can collect what is owed to them from your personal bank account.

I guided her through each entity, and how they differ based on four key elements: liability protection, flexibility of management, ability to raise capital, and tax matters. Then we matched her needs with the different criteria to find the right fit.

Contractual protections – We have a clause for that

The way you deal with the external world as a business owner makes a huge difference in your risk profile. For example, if you are the only owner of your LLC, should you sign your contracts and other documents as “owner,” founder,” “president,” or what? Who cares what you do?

A carefully drafted contract can be a powerful way to reduce risks. Contrary to conventional wisdom, contracts are not just a bunch of mind-numbing legalese that you should make as short as possible. Every word in a contract is important and it should be put there for a reason. Your attorney should write them to protect you as fully as possible, without being so overly protective or one-sided that no one will sign it.

A prudent business attorney finds the middle ground, guided by the goals and options chosen by the client. There are many variables that can protect and reduce risk. One concept that can be very helpful at times is “risk shifting.” This means that you shift a portion of risk off of you and onto the other party or parties in the agreement.  It takes skillful drafting as well as effective negotiation to create effective transactions that establish, protect, and build enduring relationships.

Insurance

Insurance can be a cost-effective way to cover certain risks. In some cases, insurance is one of the best ways to cover yourself. I have learned to rely on the guidance of good insurance brokers who specialize in certain areas. They understand how insurance works and how it can best be used to protect a business.

Business insurance today is generally sold in packages or by type of risk. That means you need to identify your potential risks before you figure out how to protect against them. You need to make sure that the insurance you are buying addresses and covers those risks.  I’ve met with many business owners who are not quite sure what their business insurance policy really protects them from. They are not clear on the limits of protection and what things are excluded. Those answers should be determined before you buy insurance, to make sure it covers what it needs to cover, and without buying anything you don’t need. Some insurance packages are designed specifically for home-based businesses. Those cover a host of risks, but do not cover buildings or employees (which are likely rare anyway).

Lawsuits

I am often asked, “Can I be sued for something related to my business?”  The answer is, “Yes!” You can almost always be sued. But the crucial question is, “Will you win or lose such a suit?” If you lose, how will you pay the winner? If you win, who pays your legal costs? Legal expenses can be substantial in a full-blown lawsuit, but in some cases insurance coverage may provide the answer. If the claim is covered and the deductible exceeded, the insurance company may have the duty to defend you and will appoint their own lawyer to work on the case up to the policy limits. If not, it’s up to you to find a good attorney to carry out such essential tasks as communicating with the plaintiff, drafting and filing required documents, and working on settlement talks, if that is appropriate.

Multiple-Owners

Owning a business with one or more partners is a good way to pool capital and knowledge to create a successful business. On the other hand, having other owners also increases risk– sometimes a tremendous risk. For example, in a general partnership each partner is 100% able to bind the business and the other partners to a variety of contracts and other obligations. Also, a partner can cause actual harm by defaming a customer or in extreme cases, injuring them.  Such partners bring risk down on all the owners, even if they did nothing. This is a classic example of why a business needs the protection of being a legal entity such as a corporation, LLC, or limited partnership,  which usually shields the partners or co-owners from each other.

It is also essential for the partners and co-owners to have legal agreements between each other. These include Operating Agreements, Buy-Sell Agreements, or Shareholder Control Agreements. Each of these is a customized document — or should be — that sets the rules and agreements between the others and the business as to how the business operates, how profits and losses are divided, and who can buy out the other or sell out.

Conclusion

Whether you are making mittens in your basement or building high-rise office towers downtown, you need to learn how to manage your risks to ensure your success. This is a multi-faceted problem, but looking at things from a legal perspective sheds a lot of light on your situation.

I look forward to discussing your business risks, legal needs, contracts, and more.  Please feel free to contact me.

Thank you!

Glen R. McCluskey
Attorney At Law

THIS DOCUMENT IS NOT LEGAL ADVICE AND MAY NOT BE DEEMED TO BE LEGAL ADVICE.  IT DEALS ONLY WITH THE MATERIAL SPECIFICALLY DISCUSSED HERE.  YOUR SITUATION WILL BE BASED ON YOUR OWN FACTS AND CIRCUMSTANCES.  YOU ARE ENCOURAGED TO SEEK THE ASSISTANCE OF YOUR OWN LEGAL COUNSEL AND TAX ADVISOR.