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Protecting a small business from legal risks involves taking proactive measures to reduce the potential for legal issues to arise. This includes developing and implementing policies and procedures that comply with applicable laws and regulations, having the proper insurance coverage, conducting regular risk assessments, and training employees on legal matters.
Business owners should seek advice from experienced legal professionals to ensure that their policies and procedures are up-to-date and compliant with all laws.
Making sure your small business is legally protected is a multi-faceted process that includes the following ten areas:
- Creating a Financial Plan and Budget
- Set Up Proper Accounting
- Separate Everything Personal from Your Business
- Follow Best Practices for Employees
- Guard Against Cyber Risks
- Protect Intellectual Property
- Insure the Business
- Use Proper Contracts with Legal Review
- Stay in Compliance
- Consult a Lawyer For Legal Advice
1. Create a Financial Plan and Budget
A financial plan and operating budget are essential for running your company properly.
Use line-item budgeted controls that are detailed. Require multiple authorizations if a line item expense exceeds budgeted limits. Track expenses and monitor payment processes for potentially fraudulent transactions.
2. Set Up Proper Accounting
Accurate accounting with timely reports is a key element you need as a business owner to make informed business decisions.
You may also need audited financial statements if you need to raise investment capital or get debt financing.
It is much easier to establish and follow generally accepted accounting principles (GAAP) if you have a well-functioning accounting system in place from the inception of your business.
3. Separate Personal from Business
For protection against personal liability for business operations, you will want to operate your business as a separate legal entity, such as a corporation or a limited liability company (LLC).
You will also want to take care not to commingle personal and business funds by maintaining separate accounts.
What are the differences between a corporation and an LLC?
A “C” corporation, an “S” corporation, and a limited liability company (LLC) are distinct types of business structures. They offer liability protection for business owners, but there are distinct differences that should be considered before deciding which type of business entity to form. Be sure to consult with legal and tax professionals when deciding.
One important difference between a “C” corporation and either an “S” corporation or an LLC is the taxation structure.
A “C” corporation is a separate entity from its owners and is subject to double taxation. This means that the “C” corporation pays taxes on its profits, and shareholders pay taxes on the profits they receive from the corporation as profit sharing or dividends.
An “S” corporation and an LLC are not considered separate entities and are not subject to double taxation. Instead, the profits and losses of an “S” corporation or an LLC are passed through to its owners and taxed as their individual income.
Another key difference between a corporation (both “S” and “C” types) and an LLC is the way the business is managed.
A corporation is typically managed by a board of directors, while an LLC is managed by its members or managers. The board of directors is responsible for making business decisions, while the members or managers of an LLC are responsible for day-to-day operations.
The regulations for forming and operating a corporation and an LLC are also different. Corporations are subject to more rigorous regulations and must file more documents with the state. LLCs are less regulated and have fewer filing requirements.
A corporation and an LLC have different ownership structures. Corporations typically have multiple shareholders, while LLCs may have one or more members that own units or a percentage of the LLC.
It is important to consider which type of ownership structure would be most beneficial for your business by considering taxation, management, regulations, and other differences before deciding on how to form your new company or how to restructure an existing company for more enhanced legal protection.
4. Follow Best Practices for Employees
Consult with a qualified human resources expert to follow the best practices for employees that are suitable for your industry sector.
You want to avoid discrimination in your hiring methods. You want to conduct appropriate background checks and drug tests of potential employees. Have potential employees agree, in writing, to these background checks and drug tests as a condition of employment.
You should train employees not to engage in sexual harassment in the workplace and enforce this policy strictly. Document any complaints carefully and take appropriate action.
5. Guard Against Cyber Risk
Cybercrime is out of control and increasing year over year. The risks of damage from data breaches, malware, corporate espionage, and ransomware attacks are very high.
How much do businesses lose from cyber-attacks?
Fundera reports the average loss from a cyber attack is $1.56 million. Data security professionals recommend spending at least 3% of a company’s budget on security and that all businesses carry cyber liability insurance.
6. Protecting Intellectual Property
If you have any intellectual property (IP), you should protect it appropriately through copyright, trademark or service mark registration, and filing for patent protection for your inventions.
Realize that registration alone does not stop infringement. You may have to sue to preserve your rights if someone else violates your IP protection.
What does it cost to copyright something, and when to use copyright?
Registering a copyright with the United States Copyright Office will cost $65.00 when using the online system. You will also need to send or upload a copy of the work you are registering.
When to use copyright depends on the situation. Generally, copyright protects original works of authorship, such as books, music, photographs, movies, and other creative works.
It is important to understand that copyright protection does not extend to ideas but instead protects the expression of the ideas. Therefore, if you have a great idea for a book, you cannot copyright the idea itself, but you can copyright the book that you wrote about the idea.
What does it cost to trademark or servicemark something?
Trademark and servicemark registrations are filed with the U.S. Patent and Trademark Office (USPTO). Filing an electronic registration for one product class is $250 to $500, depending on the category, and $750 for a paper filing.
What does it cost to file a patent?
The basic filing fee starts at $64 to $320, depending on the entity’s size doing the patent filing. There are many additional fees based on the number of claims and the record searches needed.
If you want to file a patent under international treaties to have patent protection in some other countries, then the fees increase dramatically to many thousands of dollars. Comprehensive worldwide patents can cost up to $200,000 for maximum global coverage.
If you are thinking about patent filings, you need to consult a qualified patent attorney because the system is so complex that you need a specialist to help navigate the requirements and make all the proper filings.
Trade Secrets
The filing requirements for a patent reveal important characteristics of the invention. Protecting proprietary information by keeping it secret may be a better idea.
Instead of seeking patent protection, you may choose to keep some trade secrets. Trade secrets are disclosed on a need-to-know basis. Anyone with access to the secrets must sign a strict confidentiality agreement.
7. Insure the Business
To mitigate the risk of loss, every business must have insurance.
Types of business insurance include the following:
Worker’s Compensation Insurance: Most states require a business with any employees to carry worker’s compensation insurance to protect employees and their families if they are injured or killed while working.
General Liability Insurance: Protects a business from third-party claims of bodily injury, property damage, and personal injury.
Professional Liability Insurance: Protects against professional negligence claims, errors, and omissions.
Property Insurance: Provides coverage for physical property, including buildings and equipment.
Commercial Vehicle Insurance: Covers damage and liability for vehicles used for business purposes.
Cyber Liability Insurance: Provides coverage for data breaches and other cyber-related risks.
Product Liability Insurance: Protects against financial losses resulting from claims of injury or damage caused by a company’s product.
Umbrella Insurance: Increases the underlying insurance policy limits and may provide special protection for defamation or discrimination lawsuits.
Key Person Life Insurance: This life insurance covers the damage caused by losing an important owner(s) if they die or become legally incapacitated.
Business Interruption Insurance: This insurance helps cover the loss of income if a business cannot operate by no fault of the owner.
8. Use Proper Contracts with Legal Review
Always get everything you possibly can in writing. Properly prepared contracts may be very helpful in the face of litigation.
One strategy to save on legal expenses is to draft business contracts yourself using legal contract forms suitable for your jurisdiction. Make sure the parties agree to the terms in the draft. Then, send the draft for legal review and approval by a qualified attorney before signing the final version.
9. Stay in Compliance
Be sure to stay up to date with all municipal, state, and federal regulations that affect your business. Make sure you are meeting all the requirements and filing any necessary paperwork.
10. Consult a Lawyer For Legal Advice
Protecting your business from lawsuits is a high priority because the statistics are shocking. In America, about half of all small businesses are sued in a given year. 43% are threatened with a lawsuit, and 45% are currently embroiled in litigation.
Over the lifespan of a small business, 90% will have to deal with a lawsuit. The average cost of a lawsuit is $54,000.
It is a wise idea to have an annual budget for legal expenses and put that money aside yearly to help with a future lawsuit.
Conclusion
It is nearly impossible to protect a small business from every risk. However, with prudence and forethought, you can increase your protection by following these best practices.
Author Bio:
Tailor Brands makes it easy for small business owners to launch and grow a business. Through a suite of automated tools for LLC formation, business regulations and branding suite (including logo design and website creation), business owners can build their legal and online presence in a few clicks.
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