Taking risks is an inherent part of running a business, but not all risks need to be accepted. Implementing a strategic risk management approach can help business owners minimize unnecessary risks and increase the likelihood of success. Here are some straightforward ways to manage business risk effectively.

Choosing the Right Business Entity:

The first step in risk mitigation is selecting the appropriate legal structure for your business. Companies and limited partnerships are popular choices because they offer limited liability. These entities have a separate legal personality, distinct from the business owner, which provides a degree of protection. This means that the owner’s liability is generally limited to the capital they have invested, unless they’ve provided additional guarantees, such as those to a bank, landlord, or supplier.

Dual Entity Structure:

A dual entity structure is an effective strategy to separate and protect key business assets from operational risks. In this setup, a holding company is created to own valuable assets such as property, intellectual property, and equipment. A separate operating company is then established to handle the day-to-day business operations. The operating company bears all the trading liabilities and risks, while the holding company’s assets remain shielded from creditors and legal actions. If the operating company encounters trouble, the business owner can choose to dissolve it while preserving the core assets within the holding company.

Securing Shareholder Loans:

Another risk management tactic is securing shareholder loan funding through a general security agreement. This approach is effective if the business is solvent when the security is established. It allows the business owner to prioritize repayment over some unsecured creditors in the event of a business failure. However, these security agreements must be set up early and registered on the Personal Property Securities Register to be enforceable.

Strengthening Customer Contracts:

Customers are crucial to a business, but disputes can lead to significant legal risks. Having robust terms and conditions or customer contracts can mitigate this risk. Well-drafted terms can clearly define the scope of services or products, outline limitations of liability, and set monetary caps on potential claims. Pairing these contracts with appropriate insurance policies can further protect the business, provided the insurance costs are manageable.

Effective risk management is essential for safeguarding your business. By choosing the right business structure, considering a dual entity approach, securing loans with general security agreements, and having solid customer contracts in place, you can minimize exposure to potential risks. It’s advisable to consult with legal professionals to tailor these strategies to your specific business needs.

Leading law firms offer fixed-price Initial Consultations to help you explore your options. At Core Legal, our experienced team is ready to guide you through the risk management process, ensuring your business is on the right track.