Mitigating Risk in Your Business
We all take calculated risks. Whether it’s speeding and hoping to avoid a ticket, or buying a stock based on a friend’s tip in the hopes of striking it rich, risk is a part of life. For business owners, starting a company itself is a significant risk, but mitigating risk wherever possible is the best business strategy. Risks that are not calculated, but merely unidentified can impact your business. 2-minute read.
Running a Business is Risky, But Mitigating Risk is Smart
While business owners are passionate about their craft, not everyone loves the business side of running a company. Even the most educated entrepreneurs may overlook risks that could negatively impact their business. Business owners should work on mitigating risk wherever possible, especially when simple solutions are available. Here are some avoidable risks that could have legal and financial implications for your company:
Not Having an Operating Agreement
While an Operating Agreement may not be legally required, it is essential if your entity has two or more partners. This agreement defines the roles and responsibilities of each partner or owner and outlines what happens to each partner’s share of the company in case of a change in marital status, a desire to exit the company, or death. Without this agreement, the business could face significant legal and financial implications, including potential disputes among partners and the risk of losing control over the company’s assets.
Not Having a Trade Name as an LLC
Although an LLC is not required to have a Trade Name, failing to do so means the full legal name, including “LLC,” must be used in all instances (e.g., marketing materials, emails, signage). Companies can face fines for not adhering to these requirements. The Trade Name alone can be used throughout the business by obtaining a Trade Name – whether it’s the entity name without “LLC” or something entirely different.
Not Utilizing an Attorney to Review Contracts and Agreements
Many templates are available online, but it’s crucial to ensure they are legally binding in your state and tailored to protect your business. While hiring an attorney is an investment, proactively using one to review your contracts and agreements can significantly reduce the risk of future litigation and help ensure that other parties adhere to their contractual obligations.
Not Having Correct Licensing
A business may require various licenses, from professional licenses to local business licenses. If you have employees, you’ll need a withholding license, and if you collect sales tax, a sales tax license (called a Transaction Privilege Tax License in Arizona) is necessary. Ensuring you have all the correct licenses is crucial to operating legally and avoiding fines or penalties.
Not Being Adequately Insured
Conducting an annual review with your insurance agent is vital to ensure your company is appropriately insured. This includes verifying coverage for all your locations and informing your agent about your products and services. Other important areas to address are coverage for company vehicles, business-owned tools, adequate cybersecurity protection, and ensuring you have coverage for employees who drive their own cars for company business. You don’t want to wait until you have a claim to find out you are not covered.
Employee-Related
Labor law posters must be displayed in a visible area at every location and are typically updated annually. Additional risks include incorrectly classifying employees as 1099 contractors, failing to provide the required sick leave in Arizona, and neglecting cross-training and succession planning. Although an employee handbook is not mandatory, it is highly recommended that company policies and expectations are clearly defined and communicated.
Co-Mingling Personal and Business Funds
Mitigating risk and minimizing exposure when it comes to your finances is key. Mixing personal and business funds can create serious issues, including adverse tax consequences and the potential loss of liability protection a business entity offers. Co-mingled funds blur the lines between personal and business finances, leading to complications during tax time and weakening the legal separation between the owner and the business. This, in turn, may expose business owners to personal liability for business debts and obligations, undermining the protective veil that a business entity is designed to provide.
Mitigating Risk
As business owners, we can’t know everything. But it’s essential to recognize that there are things we may not even be aware of. You don’t know what you don’t know! Instead of ignoring potential issues, take a proactive approach to mitigating risk before those risks become problems. Doing so will help safeguard your company and its future.
Kimberly Bogues | Founder/CEO, Flourish Business Consulting
Kimberly Bogues is the owner and operator of Flourish Business Consulting, guiding businesses through all stages of the business cycle. With over 25 years of experience Kimberly brings strategic insight and hands-on expertise to help clients navigate challenges, seize opportunities, and achieve lasting success. A member of Local First AZ, SHRM, and the Scottsdale Leadership Class of 16, she excels in crafting tailored solutions that drive sustainable growth.