Risk Management for Sole Proprietors

Sole proprietors need to pay special attention to the risk management strategies they adopt.

“Risk management” refers to actively addressing, managing, and reducing risks for any business. It is a rapidly growing field, partly because of the widespread and realistic fear of lawsuits. Managing risk carefully is especially important for sole proprietors, who are personally liable for all debts and claims against the business.

Your first goal is not to win a lawsuit, but to avoid a claim altogether. Your second goal is to resolve a claim without a lawsuit. Only as a last resort should you venture to court because it’s usually very expensive, and the outcome is always a gamble.

Insurance is part of a risk management program, but it does not in itself constitute risk management. Sometimes the protection of insurance is adequate, but in some cases insurance may be either too expensive or simply unavailable for particular activities.

Identify What Can Go Wrong and How to Prevent It

Start your risk management program by identifying likely risks facing your business. Evaluate your specific business activities and pinpoint where things can go wrong.

Once you’ve identified the main ways that your business is vulnerable, you should brainstorm ways to protect against these risks.

Most obviously, you should choose your collaborators, suppliers, landlords, agents, and employees carefully. Make sure to investigate in depth any deal that seems too good to be true.

It goes without saying that you should operate your business on the up-and-up. That includes:

  • filing all the required papers and getting the right permits
  • telling the truth on all documents and to everyone with whom you deal
  • keeping track of company funds, inventory, and important documents
  • paying your debts
  • delivering what you promise
  • observing business formalities, such as keeping your personal money separate from business accounts
  • putting important agreements into written contracts
  • maintaining safety standards, and
  • complying with all applicable laws, especially by paying your income and payroll taxes quarterly.

Owners must make sure their businesses comply with bureaucratic requirements. Even if a manager or another employee is in charge of filling out and filing the paperwork, ultimately it’s your responsibility as the owner to make sure your business is in compliance. Check in regularly to make sure that paperwork is getting done.

Risk management can affect your decisions about what your business actually does. You may need to change or eliminate certain activities that are uninsurable or too risky. What is too risky may depend on the law and the availability of insurance in your state — especially for construction, manufacturing, and professional services.

Implement Procedures and Checklists

Particularly if you can identify one or more risks in your business, it is essential to have procedures in place in case one of those foreseeable incidents occurs. If there’s a likely risk of customer injuries on your premises (as would be the case of an ice rink with lots of new skaters, including young children), or employee injuries (for example, if you run a photo lab where injuries might result from chemical exposure), you should have clear procedures on how to handle any injuries that occur. Failing to have a plan in place for foreseeable accidents isn’t just irresponsible: It raises the likelihood that any such accidents might be worsened by your poor response. And it increases the chances that your business could face a lawsuit for damages.

Put procedures in writing, and don’t make them overcomplicated. Simple checklists can be extremely effective.

Besides having procedures in place, it’s of obvious importance to make sure the appropriate staff are trained in how to implement them. Depending on lots of different factors, you might decide to train all staff, or just train department managers and give them the responsibility to train staff on the procedures.

A few simple checklists, step-by-step procedures, and/or flowcharts kept in a slim binder with enough copies for key staff and managers, and with appropriate training, can make a huge difference in protecting your business from a lawsuit. Injured customers or employees who perceive a system is in place to take care of them will be less likely to feel your business is to blame for their injury and therefore less likely to sue in the first place. And if they do sue, being able to show that you swiftly executed your well-thought-out procedures will go a long way in lowering your liability for injuries or damages.

Manage Employees Well

Employees make businesses vulnerable. Every business owner who hires employees should be very concerned about workplace related liability issues and take steps to decrease the risks from possible claims and lawsuits. Lay the groundwork to hire carefully, train thoroughly, supervise adequately, have solid personnel policies in place, and maintain a safe working environment.

Nolo Resources: See the Employment section for lots of useful articles on subjects related to human resources and risk management, including discrimination and drug testing. Nolo also publishes comprehensive employment law books for small businesses.

With many workplace issues, the most effective risk management technique is to implement and enforce effective policies and training programs. For instance, straightforward hiring and firing policies, including a written policy that employment is "at will," help protect you against claims of discrimination and wrongful termination. A solid orientation and annual training program for employees on sexual harassment and discrimination issues will significantly reduce your liability exposure in those areas. Every business with employees should have written, posted policies to clarify what behavior is expected and what will not be tolerated.

Beyond establishing and communicating personnel and other policies, your business needs to have enforcement mechanisms in place. The toughest written sexual harassment or safety policy won’t protect a business from a major lawsuit if there’s no one to complain to who has power to change the situation, or if complaints go uninvestigated and policies unenforced.

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