Q: I was wondering if you could give me some legal advice. I am starting a business and when I was young I watched my dad get sued out of business. I don’t want the same fate to befall me. Would you have any thoughts for a new startup on how to avoid risk and liability? – Anthony
A: No, I don’t.
Risk is part of the game and if you want to start a business, you simply have to be risk-tolerant. You cannot avoid risk altogether if you are going to start a business. As a wise man once said, “An entrepreneur is a person willing to take a risk with money to make money.” Risk is in the job description.
Part of that risk is personal – you are risking your reputation on this new business. Part of the risk is financial – in all likelihood you put your own skin in the game to launch this venture. And part of the risk is legal – if things don’t work out, you could be on the hook personally.
But, that said, there are ways to reduce the risk inherent in the game of business.
For starters, I would say be prudent with your capital. Keep your overhead low, both at the start and down the road. Financially, probably your biggest risk is the business cycle, whereby the economy generally and your business specifically, will have ups and downs, good cycles and bad.
The best way to reduce that sort of risk is through diversification. By selling a diverse portfolio of goods and services, you ensure that you will be bringing in money, no matter the broader economic situation. By the same token, you also want to strive to diversify your client base, so that you are not overly-dependent on one or a few clients or customers. Having all of your financial eggs in one basket as it were is never wise.
By the same token, it is wise to learn about and invest in passive income streams. That is, your business needs to have ways to make a buck that are not dependent upon you specifically doing something; it needs to have the ability to make money while you sleep. For example, an e-commerce website could be a fine passive income source, as could a rental income property.
Legally, I would tell you that to the extent possible, avoid lawsuits – as both a plaintiff and a defendant – at almost all costs. Oh sure, I get it, there are times you have to sue, or are sued. But by and large, as a general rule, let this be your maxim:
Avoid litigation.
Having practiced business law for over a decade, what I know to be true is that lawsuits are expensive, exhausting, exasperating, emotionally draining ways to “resolve” disputes. They can bankrupt companies, and even when you win you can lose.
Better: Settle if at all possible. Even better: Don’t let things fall apart to the point where even threatened litigation is necessary. Business really is a lot about relationships and it would behoove you to do whatever possible to foster positive ones.
Risk can additionally be managed by being smart in other legal ways:
- Incorporate: Creating an LLC or an S or C corporation creates a firewall between you and the business. Business debts will not be considered your own personal debts.
- Put it in writing: Whatever “it” is, it needs to be in writing. Why? People’s memories fade over time, and people lie. Your writing is your proof.
- Get properly insured: The point of insurance is to reduce risk. You reduce your risk by not only getting enough insurance, but the right kind.
- Lawyer up: While I am telling you that you will likely regret suing someone, you will not regret having a good lawyer on your team. A sharp attorney can not only steer you away from trouble, he or she can also protect your physical assets, intellectual property, and so on.
The bottom line is this: When you think about great entrepreneurs, it seems like they are big risk-takers. And some are – Steve Jobs for instance. But great entrepreneurs also know this: There is a difference between a wild risk and a smart one, and the savvy entrepreneur always looks to bend the odds in their favor by reducing risk to the extent possible.
