Considering that only 66% of small businesses survive their first two years, it’s obvious that entrepreneurship is a cutthroat world. If you are not battling lack of funding and economic downturns, you are trying to combat competition and attract customers. Then, as your business grows and you accumulate substantial assets, there is likely going to be someone trying to attack your wealth. That is why it is important to protect your assets against claims and lawsuits.
According to the Insurance Journal, any business faces an 11.7% chance of being sued, and that’s just from its own employees. There is an array of other lawsuits and claims that can be filed against you by your stakeholders, creditors, customers, and competitors. It is difficult to prepare for lawsuits because of their unpredictability, so it’s best to make sure that your assets are protected.
Many small business owners neglect protecting their assets until a claim against them arises. This is dangerous because transferring assets after a claim is made can be considered fraudulent activity, potentially causing other charges to be brought against you. The best time to protect your assets is now. This four-step guide will help you protect your assets from any future claims and lawsuits.
1. Do a Risk Assessment
Risks to a business include loss of credible reputation, supply chain disruption, and much more. It is a good business practice to do an assessment of all potential risks. Risk assessment can be done at any time, but it is a complicated process that is best to be performed by professionals. They will take inventory of all your business bank accounts and physical assets, and will assess your relationships with your stakeholders. They will then evaluate the risks each asset and relationship poses and suggest the best strategies to combat them.
2. Form a Limited Liability Company (LLC)
An LLC is a business structure that protects you from being personally responsible for your business’ liabilities and debts. It protects your personal assets from your business liabilities and vice versa. In an LLC, you need to have a separate bank account for your personal assets and only conduct business in the company name, instead of your own.
According to Entrepreneur, legal clauses make your business a separate entity, and if your personal creditors seek to seize your assets, there are laws protecting your business against them if it is an LLC.
However, you must put these clauses in effect before any lawsuit because it can be ineffective if you try to separate your business assets after a suit has already been filed against your business. Transferring your personal assets into your LLC to shield it from personal creditors is unwise, as creditors can claim your LLC is an ‘alter ego’ and have a legal right to come after your business assets. The same goes for transferring your business assets to shield them from business creditors.
3. Get Insurance
Archives from the Small Business Center say 40% of small businesses do not have any insurance at all, mainly because of cash constraints. Insurance is one of the most important types of protection you can get for your business. It can help compensate for your physical investments like machinery and raw material in case of possible damage like fires or robbery. It also protects your intangible assets from possible claims.
The most important type of insurance to have in a small business is liability insurance. This insurance protects you in the event you get sued. There are three important types of liability insurance: general, product, and professional.
General liability protects you when you get sued for accidents or injuries. If your employee suffers an injury while on duty, general liability insurance will help you cover compensation and related medical costs. General liability can cost as little as $500 per year, with total coverage of $1,000,000.
Product liability covers you in case your product causes any harm to the consumer. Product liability costs depend on your products. Average rates are 26 cents for every $100 of retail value.
This type of insurance is an absolute necessity as claims can be hefty. For example, in the case of Stella Liebeck vs McDonalds, the customer spilled hot coffee on herself, resulting in burns. The fast food giant had to pay her more than $600,000 in punitive damages and $160,000 in medical expenses. Such a case will bankrupt any small business without proper insurance.
Professional liability, which applies more to service businesses, protects your business in case of negligence or errors in service. This kind of insurance is also inexpensive, costing as low as $400 per year with coverage up to $1,000,000.
The rule of thumb is to have insurance that is at least equal to your business’ net worth. Meet with your insurance broker and the financial planner to discuss the types of insurances you will need for your business and the coverage that is best for you.
4. Protect Intellectual Property
Your intellectual property is one of the most important assets of your business. Anybody who gets access to your ideas and processes might decide to use them for their own business and may even claim the ideas as their own if you have not already protected them. You can protect your intellectual property through patents, trademarks, and copyrights.
You should also perform a search to make sure you are not implementing a business model that is already protected, which would restrict how you can use it. Be wary of the common mistakes startups make regarding intellectual property.
Losing your assets after you have put in so much work to accumulate them is probably one of the most horrific nightmares of any business owners. Whether you’ve just opened your business, or you’ve already established yourself in the market, it’s important that your assets are well protected and safe from possible claims, and the four steps above are the most necessary to start with.
