Written by Alice Stevens | Last Updated November 1st, 2019Alice Stevens is a language enthusiast, loves history, and enjoys traveling. She manages content for BestCompany.com specializing in finance, insurance, and car warranty.
Starting a business comes with many types of risks, including financial and legal risks. Business owners and lawyers share five ways entrepreneurs can protect their business.
Safeguard business finances
It’s important to have clear lines between your business finances and your personal finances, especially once you’ve incorporated your business to protect your personal assets.
Katie Ziskind, a family therapist with her own counseling practice WisdomWithinCt, says, “Have an entirely separate bank account, credit card, and debit card for your personal finances. Never mix or pay for a personal expense with your business cards. Likewise, never pay for a business expense with a personal card out of convenience. This creates a healthy boundary and sets your business and personal life up for success financially.”
Contracts and payment are other important factors to consider when dealing with business finances and protecting your business.
Ian Wright, founder of Merchant Machine, says “Contracts are not always realistically enforceable. For example, if you have a contract to provide web design services for $2,000, but your client doesn't pay, you can of course take them to court over it. However, the time, effort, and money spent doing so can easily exceed the contract value, which means the rational choice would be not to chase it.”
No one likes it when someone fails in their part of a deal, especially when it comes to payment. What can you do to protect your business’s income?
Wright says, “The solution for me is to start small with clients and see if they pay on time. If they do, then I expand working with them.”
Another way to protect your business’s income is to ask for part of the cost upfront with the remainder due upon completion.
These strategies can protect your business’s cash flow and keep its finances in the black.
Purchase liability insurance
Tina Willis, Orlando injury and accident lawyer and owner of Tina Willis Law, says “My first piece of advice is to purchase general liability insurance, to cover things like slips and falls, and professional liability insurance, if they are a professional who could make errors during their work.”
Liability insurance can help pay for monetary damages resulting from a lawsuit. Legal damages can be quite high, so this kind of insurance can protect your business’s finances and assets in the event of an accident.
“Personal injury lawyers, like me, generally will seek insurance coverage first, then only look to business assets in extreme catastrophic injury or wrongful death cases. Even then, if the insurance coverage if high enough, the chances are very slim that we would look into business assets,” Willis says.
“I would recommend one million dollars in coverage for most small businesses, but more might be warranted if they have extremely high net worth. Basically the coverage should match the financial protection they need, but one million dollars is enough for most small businesses. This should not be overlooked because we routinely handle cases on behalf of individuals who have been injured or killed on business properties.”
In addition to general liability and professional liability insurance, there may be industry-specific liability that you should consider, like product liability.
When purchasing liability insurance, make sure that you understand the terms of the policy. You should also understand what kind of liability your business needs.
For example, Bret Bonnet, Co-founder and President of Quality Logo Products, says, “As a distributor, we don’t physically touch any of the thousands of promotional products we offer for sale. All our vendors list us as an additional insured on their insurance policies. In the event a product recall is necessary or a product accidently causes harm to a customer, the vendor’s insurance would cover this claim and not our own insurance.”
Being listed on their vendors’ insurance policies makes the claims process easier for the company.
“It might seem trite, but it saves us from having to make a claim with our insurance company, and in turn, our insurance company taking action against that of our supplier!” he says.
Trademarks and intellectual property
Trademarks identify your business and are an important part of your brand and how customers will recognize your business. Trademarks can be images, symbols, and even products. You’ll want to ensure that no competitor uses your branding and that others use your trademarks appropriately.
Tina Willis, Orlando injury and accident lawyer and owner of Tina Willis Law, advises “If you have any ideas, inventions, slogans, or logos, which you want to protect, then you really should consult with a trademark lawyer early in the business formation process.”
Another important consideration for some businesses is intellectual property. Intellectual property can have a lot in common with trademarks.
Intellectual property includes ideas and inventions that were created by you or your business. They may be innovative products, which means you don’t want your competitors to be able to take your patent, make a cheaper product, and earn larger profit margins that your business does.
“If the business will own or rely on intellectual property, the owners should take care to ensure that the ownership, licensing, and related materials are in order,” says Justin Kelton, Partner at Abrams Fensterman focusing on complex business litigation.
You can file the licensing paperwork yourself or work with a lawyer to ensure that it is done correctly.
Dr. Julie Gurner, who has served on advisory boards of start-ups, says “Something legally I see all the time, is that founders don't protect and shore up their intellectual property. While it can seem a minor issue as well as expensive line item when beginning, it goes a long way to ensuring your future as you scale.”
Protecting your business’s intellectual property is an important way to secure your business’s future and ability to grow.
Get a lawyer
Many online legal services are available to help with business formation and creating legal documents. These services can be useful if you want to avoid high attorney fees.
Matthew Fornaro, Esquire of Fornaro Legal, recommends avoiding the internet. He says, “I guarantee that the “right” answer may be out there, but it is indistinguishable from the wrong answers. Invest money into your business by hiring a business law attorney who focuses on working with small businesses and start-ups.”
Tracking down all of the legal answers and figuring out the forms can be time-consuming, especially if it isn’t your area of expertise. Hiring a lawyer can save you time.
Will Craig, Managing Director of LeaseFetcher, also recommends getting a lawyer to keep track of all the legal matters. He says, “The best advice I was ever given when starting my business, was get a good lawyer. I still stand by that advice to this day. When you're setting up your start-up, there's a lot of legal things that you have to bear in mind — like setting up the right business structure, drafting shareholder agreements, and filing patents, etc.”
As you are thinking about your business’s legal issues and choosing a lawyer, it may be worthwhile to consider law firms as part of your networking strategy.
Tarek Alaruri, Co-founder of Fairmarkit, says, “Find two legal firms: one high-powered with connections and introductions and the other for the grunt work, like patents, trademarking, contracts, etc. I think having both allows companies to leverage both the prestigious names and connections while keeping costs down.”
Seek industry-specific advice
When it comes to choosing a lawyer or a law firm, you should focus on your industry and your business’s needs.
“Each business type has its own risks and potential liabilities that need to be gauged on a case by case basis. Find a lawyer that has specific knowledge of how the industry operates. In this way, you will get counsel from a lawyer who can guide your business away from potential pitfalls and show you how to take proactive steps to guard against potential problems,” says David Reischer, Esquire, Attorney, and CEO of LegalAdvice.com.
When it comes to protecting your business, general legal advice and industry specific advice is plentiful; however, legal advice tailored to your business will often be the most helpful in reducing risk.
Kelton says, “In sum, business owners should identify the most significant aspects of their enterprise, and consult with experienced counsel to determine the best ways to protect the firm.”
View advice on business legal formation and starting a business with partners.