Things to Think About When You Start a Small Business

Key concerns to keep in mind as your business grows and evolves

JULY 2022

Things to Think About When You Start a Small Business

Many businesses are born from a single brilliant idea. As that idea is put into motion, a company grows — and in some situations that growth is rapid. Along with this expansion, however, comes the reality of risk.

There are approximately 1.3 million small businesses, according to the Small Business Branch of Economic Development Canada. The owners of those businesses face many risks. Would you be prepared if a disaster struck?

You may initially think you are, but there’s a good chance that additional considerations need to be made to fully protect your business against loss. Regularly assessing potential risks and modifying plans can help you safeguard your business and stay nimble in the face of evolving threats.

Select a business entity carefully

Maybe you started your business with a specific business entity in mind — for example, as a sole proprietorship. But as your business expands, this structure may no longer fit your needs. Ask yourself regularly if your current business entity setup is still relevant, and whether you need to evolve. Thinking through this question will help minimize future risk.

Many business structure options exist, such as partnerships, corporations and Canadian-controlled private corporations. Every option has its unique pros and cons, and whether an option is relevant for your business will depend largely on individual business circumstances.

Selecting the right structure allows you to create a wall between your personal assets and your business — something that’s critical when considering potential exposure. Speak with an attorney to discuss the details of your business and which business entity is the best fit.

Hold personal assets carefully

Hold your personal assets strategically to keep them safe. Most business owners hope they’ll never face a lawsuit or other situation that could threaten their assets, but it’s important to consider this potential risk.

For example, you might decide to put investments into a trust or keep some assets in the name of a spouse or child. For smaller businesses, it’s often advised to keep separate bank accounts for business and personal expenses.

Keep diligent track of credit

Your personal credit may intersect with your business credit, depending on the selected business structure. This is a good reason to spend time carefully considering the various entity structures and which one is right for your situation.

Operating an incorporated business may help keep losses and liabilities away from your personal balance sheet and off your credit report. At times, business loans, including business credit cards, may require a personal guarantee, which means that you’re personally liable for any debt incurred on the account.

    Business owners policy

    A business owners policy will combine three essential insurance coverages for your small business:

    • Business property insurance for the location you rent or own and any property like tools, equipment and inventory
    • General liability insurance for the cost of property damage, bodily injury or advertising claims
    • Business income (interruption) insurance for lost income if you are unable to operate due to a covered event, such as a fire or theft.

    Think outside of the box regarding professional liability insurance

    Doctors, lawyers, accountants and other professionals aren’t the only ones who need professional liability insurance. Anyone who has a special skill or knowledge is considered a professional and could be at risk for a lawsuit alleging malpractice or negligence. For example, wedding planners and hairstylists have faced lawsuits even though most of these businesses don’t traditionally think of themselves as needing professional liability insurance.

    Additionally, if you expand your business to cover a new industry, check with your insurance broker to make sure your existing policy extends to the new business.

    Plan for business interruptions

    If something keeps you from operating your business, such as a fire, hurricane or another covered event, it’s critical to have business interruption insurance to assist with expenses. When estimating your business income coverage limits, use the annual gross earnings listed on your business financial records.

    Not having this coverage could put you in a less-than-ideal situation. For smaller businesses, this could mean tapping into personal savings to keep operations flowing and pay employee wages.

    Since business interruption insurance only kicks in for a covered event, talk to your insurance broker about adding flood, earthquake and sewer backup coverage to your policy. For example, just a few inches of water can cause tens of thousands of dollars in damage (and you won’t be covered if you don’t have flood or sewer backup insurance).

    The bottom line

    You’re passionate about your company’s future. One way to ensure that your company continues to thrive is to stay ahead of potential risks. If you need assistance understanding the risks unique to your business, arrange a meeting with your insurance broker for sound advice.

    Copyright © 2020 Applied Systems Inc. All rights reserved.

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