You’ve spent years of your life building a successful small business. How do you protect your operation from being destroyed by legal proceedings, natural disaster, or even sudden death?
The Intuit Small Business Blog recently presented attorney Michael J. Duffy with several potential scenarios — and asked him what general steps business owners can take to minimize their risks and ensure the long-term safety of their assets during crisis situations. Here’s what he had to say.
1. Natural or man-made disasters: “The shotgun approach to true catch-all protection is insurance — good insurance, with a realistic coverage limit.” Duffy says. The types of policies you may need will vary based on your industry and other factors. Businesses that are leasing or financing their space, for example, may only need general liability and property insurance. Businesses that own their space outright should consider fire, theft, and disaster coverage to protect the asset. Different types of insurance coverage are sometimes required by law; even when they’re not, Duffy advises entrepreneurs to “get it anyway.”
2. Unexpected death of an owner: You can survive many types of catastrophes. You cannot, by definition, survive death. As a result, Duffy says the sudden or otherwise unexpected death of an owner can be too difficult to overcome. “In my experience, many small businesses simply cannot operate without the owner,” he says. “Small-business owners are the heart of the company, and just like the loss of the heart in a human, loss of the heart of the company can result in death.” With the death of a sole owner, the future of the business can usually be determined by a will or inheritance laws, Duffy notes. It can be more complicated when there are multiple owners or partners. “A good partnership agreement, operating agreement, or bylaws are essential to ensuring continuity in the face of disaster,” he says.
3. Civil lawsuits: Lengthy litigation and other legal issues are usually expensive and potentially disastrous for small businesses. Duffy notes that lawsuits are very situation-specific. “However, in most civil liability cases, the formation of a limited liability business entity, such as an LLC or corporation, can make all the difference between the protection of personal assets and the loss of everything you own,” he says. When a lawsuit is business-related — the result of an equipment failure or a negligent employee, to cite just two examples — the potential losses are limited to the business entity, rather than extended to any personal assets, such as your home. An LLC can also act as a deterrent against lawsuits in the first place. “If your business is of limited assets, the opposing party may not be willing to devote many resources toward the case,” Duffy says. “If additional assets are at risk, there may be additional incentive to go after everything and anything.”