As an entrepreneur, one of the most important aspects of your business is to always have your contingency plans in place. Find out how you can implement a system to protect your business using these 5 simple steps.
For most entrepreneurs, it’s easy to get caught up in creative big picture ideas and lose track of the details. It’s a way of life and it’s great.
The problem arises when you find yourself stuck in a case of he said she said without the details you need to back up your story. You have to ensure you have systems in place so that you’re protecting your business and limiting your liability from the start if you want to grow and expand.
So how can you protect yourself from costly legal dealings? Use the 5 tips below to implement contingency plans right from the start.
#1. Consider incorporation.
If you’re running an active business, one smart and simple way to limit your personal liability and create degrees of separation between your personal assets and your business is to incorporate your business.
Corporations are treated as separate legal entities, so if a disgruntled associate, clients or otherwise has grievances that arise throughout business dealings, you limit the potential liability to the business. On the other hand, if you operate as a sole proprietorship or another form of partnership, you may open yourself to personal liability – putting your personal savings, personal assets and otherwise on the line.
Now, depending on the nature of your business, you may decide to ‘take your chances’ on liability risk in favour of other benefits from an accounting perspective.
It’s true that in some instances, it may be financially beneficial for a business to take advantage of tax opportunities that are available to smaller proprietorships than those that are available to a corporation given a certain income level – and that’s a call you’ll ultimately have to make. It’s a good idea to have a discussion about tax implications with your accountant before you decide on what’s best for you, because there are potential tax advantages as a corporation as well. These are details best suited for your accountant and/or lawyer.
As a rule of thumb, the risk of opening yourself to personal liability just isn’t worth it.
Sure, your business may save a few hundred dollars on taxes (that depends on the particulars of your business operations) – but incorporation is the ultimate contingency plan for any entrepreneur who wants to grow a business generating $500,000.00 or more in annual revenue.
Don’t fall into the trap of thinking that so long as you conduct your business dealings in a cordial and straightforward way, things ‘should be fine’. As an entrepreneur, you need to create contingency plans to protect your business and limit your exposure. That doesn’t mean your focus should always be on the worst case scenario, but you have to keep an eye on potential risks and mitigate your potential losses right from the start.
Things happen, people miscommunicate, emotions can get heated and cloud judgement, people can take advantage of you and before you know it, you can find yourself locked into a legal battle. Trust me, it’s happens and the last thing you want in these types of stressful situations is to be worrying not only about the issues at hand and your business – but also the potential of having your personal financial assets and savings on the line.
#2. Keep detailed files.
How good are you at administrative work? If like most entrepreneurs, you fall into the ‘big picture forget the details’ camp, you’re gonna want to make sure you get an administrative system at work behind the scenes with an assistant or otherwise.
The best protection against frivolous claims is detailed files.
You need to have a chain of evidence that shows a timeline with proof to back it up so you can quickly address false accusations and squash any wasteful legal costs before it even begins.
Be sure to retain copies of agreements, print emails, document meetings and keep details in one file per every account or client. I know people say 7 years, but I’d say go ahead an keep it for 10 years or more. You want to have detailed files organized by each account or client, so that if ever you do need to present evidence in court, you’re ready to create a clear chain of events with evidence to back it up.
If you do have to appear in court, or at a tribunal or even a mediation session, your paper trail – not first-hand accounts of stories that may have occurred – is what’s going to save the day and win your case.
#3. Put all your agreements into writing.
Are verbal agreements valid? Sure, but they are impossible to prove. There’s an old saying I keep at the forefront of my mind that every entrepreneur should know: “A verbal contract is only as good as the paper it’s written on”.
In other words, it stinks.
First off, there’s no paper trail that an agreement ever took place. Not to mention the fact that, if it isn’t in writing, chances are good that there’s going to be at least SOME misunderstanding of what the agreement is. Putting agreements in writing isn’t just about making sure you have a paper trail, it’s also about creating clear expectations for everyone involved.
You may think, ‘Oh, I don’t need a contract with him. He’s a friend, I trust him – it’s all good.”, and you wouldn’t be the first person to learn this lesson the hard way. Yes, no matter who it is, when it’s business, you need that agreement in writing.
There are tons of benefits to having your agreement in writing, most of all – peace of mind. Putting your agreements in writing forces you to be clear on the details and gives everyone the benefit of clear expectations. This not only gives you peace of mind and a paper trail, it also allows your partnerships and agreements to flourish without getting caught along the way on assumptions or misunderstandings.
And, if you do find yourself in court facing claims, a written agreement will be the defining evidence you need.
#4. Plan for the ‘worst case scenario’ in writing.
So now that you know just how important your paper trail and written agreements are, it’s time to talk about written contingency plans.
Ideally, you’ll have a lawyer draw up your agreements for you but I know more than a few entrepreneurs who get templates and fill in simple agreements in certain situations. That’s fine, you save a bit of cash and you make sure there’s a paper trail for your agreement so everything’s all good right? Wrong.
A simple agreement does look appealing at first, but there is one common element that is generally missing from these. The consequences of what is to happen in the event that one of the parties does not hold up their end of the bargain.
You want to have agreements that clearly outline process for how to deal with conflict and other ‘worst case scenarios’ that are simple and clear. If you can put deliverables, specific expectations, and payment that’s important but remember to put into writing what the consequences for non-compliance would be, and even unforeseen events wherein one party chooses to leave the contract. Once you have that contingency in place and in writing, you mitigate the chances of entering in costly, legal battles because all the parties have a solid outline of the process to follow.
#5. Organize your files the way you would present evidence in court.
Now that you have your paper trail, your agreements in writing and your contingency plans in writing, there’s another contingency plan you need to have in place all on your own… Presenting your evidence in court.
There’s nothing worse than drowning in a sea of paperwork while you’re trying to deal with convoluted legal processes and jargon. Save yourself the hassle and use a filing system that is organized just as you would present files in court.
- Create a Master Timeline: This means that you’ll have a clear timeline of dates that show what has occurred. For every date, a simple sentence or two should quickly describe what happened at that time.
- Cite Sources for Each Timeline Entry: Each date and point should then point refer to ‘proof’. Your timeline has dated entries and the facts that occurred, while your proof backs up both the date and what happened.
- Separate Your Timeline and Your Proof: You don’t want the timeline and evidence muddled together, so instead label your source documents with proof names (i.e. exhibit A, B, C, etc.) and keep the proof in the subsequent tab of your master timeline for each file. This way, after each entry on your timeline, you can include a bullet “See exhibit X’ for quick and easy reference.
This way, if you do have the misfortune of dealing with a legal battle, you’re already prepared with evidence that is organized in a clear and concise way to make and win your case.
Once you have these systems in place, you’ll mitigate your chances of ever even having to deal with a legal waste of time and money because you’ll have the paper trail and organizational system you need to dispel false accusations before anything escalates. And, in the ‘worst case scenario‘ that it does go to court, you’ll be armed and ready with a powerhouse arsenal to win.