2009 Small Business Guide
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small business
7 ways to minimize small-business risks

5. Use contractual indemnification clauses

Seek indemnification for potential damages caused by other businesses and people your business relies on regularly. "Let's say you distribute a piece of software to your customers," says Ezor. "It turns out the provider didn't have the rights to the software, and you get sued. That's where indemnification comes in. But it's only as good as the finances of the other party. If you're worried the finances on the other side of the contract aren't sufficient for the possible risk, you can contractually require the other company to maintain insurance."

6. Give yourself an out

If you launch a new venture or enter into a new contract, you need to be able to cut your losses if it goes bust. "Your contract should cover how you can end the relationship," says Ezor, "and what happens when you do."

7. Create separate entities

Any time you take on a new risk, consider creating a new legal entity. "If a new risk involves the same market but a different set of customers, you probably don't need a new entity," says Lovingood. "But if it adds additional risks from a monetary, lawsuit or partnership standpoint, you need a separate entity. Any time you cross state lines, add partners, or add legal risks your current business doesn't already deal with and that you're not insured for, look at separate legal structures."

Also use separate entities to prevent the loss of your assets. "Whenever significant long-term assets exist, consider a separate holding entity," explains Kirkup. "Real estate is the prime example. Put property into a separate entity, and rent it back to the business. Another example could be patents for your products."

Don't shy away from creating new entities because of the cost. "In most states, setting up a corporation or limited liability company costs $400 to $600, and your accountant may charge you to do an extra tax return," says Lovingood. "You may pay only $1,000 a year for additional risk and asset protection."

The key to minimizing risks is foreseeing and preparing for them. "Small-business owners can get off track by falling into the prediction trap," explains Randy Park, a Toronto-based author and speaker on small-businesses. "You assume that what happened yesterday is going to happen tomorrow. But you need to be really clear on the risks affecting your business model."

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