Protecting Founders From Surprise Liabilities
I’m on the side of startup entrepreneurs and small business owners. I want their companies to be financially successful without putting the founders in a position of unreasonable personal risk.
What I’ve observed in working with business owners across the country is an admirable dedication to their companies. They work extra hard and often sacrifice their own personal self-interest to advance their companies. That’s ok, to the extent that they are fully aware of the personal implications of their professional pursuits.
Here are some action steps to help safeguard your personal assets from unexpected business surprises.
No. 1: Get insured. Today there are about eight million business owners who operate out of their homes. A standard homeowner’s insurance policy does not offer the same level of insurance coverage needed by most small businesses, especially if the business owns expensive office equipment. General liability insurance policies can cost as little as $500 for a broad range of business-related coverages.
No. 2: Start smart. Sure it’s fast, easy and inexpensive to set up a new business as a sole proprietorship. But sole proprietorship business organizations leave open the potential for business creditors to turn to the business owner’s personal assets (home, bank accounts, valued possessions, etc.) to pay off business obligations. To minimize potential liabilities, consider establishing your business as a limited liability company or a corporation.
No. 3: Read the fine print. Even if you set your company up as a corporation or limited liability company, you may still become personally liable for your company’s unpaid business debts. It happens when business owners sign documents that include “personal guarantee” language that obligates the signer to personal repay unpaid debts. You can find this language buried in business credit card, bank loan, equipment leasing and tenant agreements.
The best way to protect your personal assets is to negotiate away personal guarantees everywhere possible. In my book, there is no office space that is really worth business owners reducing their overall personal debt capacity all because they have signed a contingent personal guarantee with a landlord. The real estate market is soft; business owners are in the best position to negotiate hard.
No. 4: Protect your innovations. Startup entrepreneurs and well-established businesses frequently work with independent contractors while developing new products or technologies. To clarify the ownership of intellectual property rights, add assignment clauses to all independent contractor work agreements to ensure that your company exclusively owns all related intellectual property. Here’s an added tip. I recommend that technology-oriented business owners have new employees sign confidentiality and assignment agreements on the first date of work too.
No. 5: Don’t promise what you can’t promise. Can you ever “guarantee” that your company’s product will be a big hit or your company will grow to a multi-million dollar enterprise? In their enthusiasm to impress potential investors, entrepreneurs can over-sell their company’s prospects in ways that can violate state and federal securities laws. No investment in an entrepreneurial company is every “risk-free.” Business founders can reduce the risks associated with dealing with disgruntled shareholders by disclosing investment risks in a candid and honest way.
No. 6: Check the books. Employee theft within small businesses is common. Sure, most businesses can spare a few office supplies, but more systematic theft in the form of well-disguised changes to reported work hours to payroll companies; payments to non-existent vendors; padding vendor bills with kickbacks to employees; etc. can substantially reduce the company’s year-end profitability.
Certainly no business owner wants to add more administrative duties to an already over-committed work week, but consider random reviews of any staff member who has access to bank accounts, automated billing functions and revenue collection systems. Are you sure your company is really collecting all of its Internet-search related revenues or is your Web developer getting some extra beer money each week? Check it out!
Susan Schreteris known as the “Big Voice for Small Business.” She is a 20-year veteran of the venture finance community and a university educator in entrepreneurship. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.