Starting a business comes with a significant degree of risk. A substantial percentage of new businesses fail in the first five years. Even companies with unique offerings can be vulnerable due to litigation or sudden changes in operational costs.
Aspiring entrepreneurs thinking about running their own businesses often need to plan carefully if they intend to minimize their direct liability. There are several important moves for people starting businesses to make during the startup process. While many of those moves depend on the type of company and the industry in which it may operate, the three outlined below are generally beneficial regardless of the type of business started.
Research risks and requirements
Many entrepreneurs get in over their heads by moving into a heavily-regulated industry without the right licensing. They may be at risk of litigation or even criminal prosecution if they do not have necessary business licensing. Entrepreneurs also need to consider what could go wrong given the type of business they intend to run. They may need to invest in various types of business insurance. From workers’ compensation coverage to protect against injury-related liability to business interruption insurance, there are many types of policies that can protect business owners from liability if the company fails or if something goes wrong.
Plan to scale up slowly
With exceptions for those starting a complex corporate entity and bringing in outside funding, most people need to plan to grow their businesses slowly. Rapid expansion can drastically increase operating expenses and legal exposure. Business owners who plan to slowly scale up operations can grow in a sustainable manner. Having a plan for launching new products, expanding the services offered or growing into new facilities can reduce the risk of failing due to growing pains.
Create legal separation early
One of the most common mistakes entrepreneurs make involves starting a business informally or as a sole proprietorship. They may commingle personal resources with business finances and may not maintain adequate documentation of company operations. By blurring the line between the business and the person running the company, the entrepreneur puts their personal assets and future income at risk. It is generally necessary to establish the business as a separate legal entity as soon as possible and to create separate financial accounts as well.
Securing legal guidance and advocacy during the business startup process can also help people mitigate their risks. Aspiring business owners with the right plans and support have less reason to worry as they begin developing a business concept.