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Minimizing the risk of operating a small business

Minimizing the Risk of Operating a
Small Business
Through Risk Management…
…and next week: Insurance

BUS 212 RM&I I Spring 2006
copyright, SJH

Business & Risk
 Every business venture is risky.
 We take risks, starting a
business, investing our time,
money and reputation.
 Often times the higher the risk,
the higher the reward.
 The questions we need to ask
ourselves include how much risk
are we willing to take on? Are
we willing to lose money, our
homes, our assets, our


Risk Management: Asking the
What IF Questions
Risk Management is the identification of all
exposure to financial loss of your
business. It includes the selection of
techniques to manage those exposures.
No one knows your business better than
you. It is up to you to ask yourself, the
difficult “what if” questions:
What if the firm burns down?
What if my employee gets hurt?
What if I get sued?

Insuring Strategies for Small
As a business owner you can:

Assume the risk
Self insure
Avoid the risk (don’t go into a highliability business)
Transfer the risk
Reduce the risk
- Educate Employees
- Practice Safe Business Practices

Assume the Risk
 Let’s Face It!…most entrepreneurs
don’t get insurance, because they
don’t have the money when they

first start.
 Many business owner’s choose to
TAKE A CHANCE, that they
won’t get sued.
 Your probability of being sued in
the first few months of business is

Self Insurance
 Create your “own insurance company.”
 Set- aside a “slush fund” or a “self-funded”
 Some small businesses will put aside 2% of
gross profits.
 Many small business owner’s will take this
course for employee health insurance.
 The disadvantage is it may not cover the
 The advantage is you have control over the

Transfer The Risk
 Push the liability on to the
customer or client…
 It helps create an awareness for
the customer to be more
 This is common practice for
many service businesses: theme
parks, health clubs, cruise
 Of course, you can still be sued.

Educating Employees to Safety on
the Job
o Educating your employees to
safety issues can help reduce
the risk of accidents and injuries
and discrimination
o Many larger businesses are
required to have safety protocol
training (because it lowers the
insurance premiums)
o Common Training:
Sexual Harrassment
Product Handling

Choosing a Legal Structure
The First Step in Covering Your Assets
One of the most important decisions
you can make is how to legally
structure your business.
One of the primary considerations is
the amount of personal liability you
could incur as a small business
owner. Liability is a RISKY for a
As a sole proprietor or partnership,
you are your business, and this
means, unlimited liability.

Sole Proprietors & Partners:
Unlimited Liability
 Although being a Sole Proprietor has
some tax and other advantages, you are
still assuming risk and potential liability.
 What does unlimited liability mean?
 You and your partners are responsible
for the full amount of business debt,
which could exceed your investment.
 This “unlimited liability” means that all
your personal assets are at risk, if you
should default or be sued. This liability
extends to your personal assets (ex:

How can you Avoid the Risks of

Unlimited Liability
 Consider incorporating your business
if you are concerned about losing your
personal assets.
 For many industries it is STANDARD
protocol to incorporate as a “C”
corporation, an “S” corporation or an
 Industries and businesses that
“assume” more risk are those in
construction, day care or those that work
with heavy equipment, and those
businesses with many employees.

Corporations & Limited Liability
Companies (LLCs)
 Protection from personal
liability is the main
advantage of a Corporation
or a Limited Liabililty
Company (LLC).
 As a corporate entity your
business is a “separate
entity”; so shareholders are
liable only for the amount
they have invested (not their
personal assets).

To Incorporate or Not?
• Consider the amount of assets you have to lose.
• Consider the industry standard for your
• Consider the size and potential growth of your
• Consider the tax and government regulations for
• Consider your own risk level.
• Consider other methods of “covering your
assets” and minimizing your risks.

Risks: Controllable or NonControllable
• It is important to first
analyze what risks
are controllable, and
what are not.
• Controllable. really
means that the
financial impact can
be minimize SHOULD
something happen.

Risk Controlled or More Profits

• Taking a calculated risk means less coverage,
and therefore less premiums, which boils down
to more profits for the business.
• Take into consideration: your risk level, and the
industry standards.

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