4 Ways to Protect Yourself When Starting a Business

Posted on December 2, 2008 by David Gass 2 Comments

When you start a business there is always a chance that the venture won’t work out the way you want. In fact more than 80% of the time businesses fail in the first five years. I’m sure you’ve heard that statistic before. In my opinion I believe the number is even higher because of the many number of entrepreneurs who start without filing a business license or setting up a checking account and they are unable to be tracked for statistics.

I’ve known a lot of people, including myself that have started companies only to find ourselves a few months or years later with nothing to show for all the hard work, money and sweet we put into the deal.

When it comes to starting a business I make sure I always do four things to protect myself in case the venture fails, and yes I never go into a venture with the expectation to fail. I never have fail as an option, but I also know when to cut and run. There is a fine line between the two and you have to find your own comfort zone when it comes to that line.

The four ways to protect yourself when starting a business are:

1. Incorporate – I almost always file a corporation for my business ventures. If I am bringing in partners and everyone has their own strategy for holding ownership interests in the venture, I’ll form an LLC (Limited Liability Company). In almost every other case I file an S Corporation.

2. Separate I.P. (Intellectual Property) – If the business have any intellectual property I will set up a C Corporation and place the ownership of that I.P. in the entity. I.P. that would benefit from this includes but is not limited to: patents, trademarks, service marks, or any other publications/books or writings. This keeps the “ideas” out of the operating entity in case there are any judgments or liens on the operating entity.

3. Insurance – I will always sit down with my insurance agent and get a couple different policies so in case I am sued I have coverage that will pay for it up to a point. Work with your insurance agent to determine which policies are best for you.

4. Develop a Plan – Always, ALWAYS have a plan. Write down exactly what you intend to do before you take any steps to starting the business. Write your plan by starting at the end. Ask yourself what your exit strategy is, what amount you want the business to be worth in five years and then determine what you need to do to reach that level. The plan will write itself once you have the exit worked out.

Having protection in place will only help you protect the assets you have in other businesses and your personal life. This is exactly what the wealthy people do, look at Donald Trump. People say he filed bankruptcy two or three times. Fact is HE didn’t, but a couple of his businesses may have. If those businesses were not incorporated he would have lost a substantial amount of his net worth. Instead he protected himself and was able to work on other ventures to create the fortune he has now.