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Legal & Insurance

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Body_KeyMan.jpgBy Susan Caminiti.

 

When Micron Technology CEO Steve Appleton, 51, died in a plane crash on Feb. 3, the company not only lost its long-time leader, it experienced a stock price drop amid concerns about who would take the helm at the memory chip maker.

 

The company’s board of directors swiftly announced that COO D. Mark Durcan would replace Appleton. But what if—as is so often the case with small businesses—there isn’t another qualified person waiting in the wings should tragedy strike at the top?

 

If that's the case, so-called key person insurance can help soften the blow. This type of policy protects a company in case of an untimely death of a critical manager or employee; in the case of a small business, that usually means the owner or founder and a few top people. The company is the beneficiary of the policy and pays the premiums, so should this key person die, the business gets the insurance proceeds.

 

“The purpose of key person insurance is to help the company survive the blow of losing the individual who makes the business work,” says Loretta L. Worters, vice president of the Insurance Information Institute based in New York City. “The company can use the proceeds for expenses until it can find a replacement person, or if necessary, buy out the heirs of the deceased. It gives a company breathing room to make the next step when they’ve lost this key person.”

 

PQ_KeyMan.jpgAccording to Worters, a small business needs key person coverage when:

 

  • The business is a professional services firm and key employees can’t be replaced right away. For example, a law firm or medical office cannot replace an experienced attorney or doctor with a recent graduate.

   

  • The business cannot continue in the event of a loss of a particular person. Worters cites producer and director Tyler Perry of Tyler Perry Productions. “Without him,” she says, “there is no business.”

 

  • Business continuity is a concern. If there are partners in a company and one dies, the deceased’s shares will likely go to his or her heirs. Do they know the business? Are they interested in being involved in running the company? If not, the proceeds from key person insurance can be used to buy out their stake in the company.

   

  • Future financing is possible. Venture capitalists, banks, and other lenders often require key person insurance for start-up companies. In the event of a death, the insurance proceeds can be arranged to go directly to the venture capitalists to protect their investment.

 

  • The business owners are between the ages of 30 and 55. It’s human nature for young people to ignore their mortality and this lack of planning can hurt a company in the case of a tragedy, Worters says. Further, she adds, “Entrepreneurs are, by nature, risk-takers.” For instance, Appleton of Micron, was piloting a small experimental plane when he crashed and died—and had been in previous plane crashes as well. (The company’s financial filings with the SEC make no mention of key person insurance for Appleton.)

 

Despite all these reasons, less than one quarter of small business owners surveyed by the National Association of Insurance Commissioners have key person policies in place. Yet 71 percent say that they are “very dependent” on one or two key people for their company’s success. This disconnect stems from a belief that the insurance is prohibitively expensive or difficult to obtain. Not so, says Robert Garner, executive vice president of wealth management at CBIZ Insurance Services in Baltimore. “Most insurance companies will cover one to two times a person’s annual compensation,” he says.

 

The majority of key person policies are basic, inexpensive term coverage that spans the numbers of years until the person reaches retirement age—65 in most companies. The actual cost, says Garner, depends on the health, age, lifestyle (does the person like to fly small, experimental planes or bungee jump, for instance) and medical history of the person being insured. Permanent insurance—or a policy that accumulates a cash value—is more expensive to obtain, but allows a company to borrow from it with tax-free loans.

 

Carl Belt Jr., president of The Belt Group Inc., a construction company based in Cumberland, Maryland, has key person insurance policies for 10 employees and shareholders. The first policy was taken out on his father, who started the company in 1962. “By the time my Dad died in the 1970s, I was running the company and the proceeds from the insurance helped me buy out his stake in the business,” Belt recalls. “Basically, I was paying my mother for his share. It would have been difficult for me to do that without the insurance.”

 

Over the years, Belt’s business has expanded to about 250 employees and now includes roofing and paving businesses. He’s also taken on several shareholders. With nearly $60 million a year in revenues, he says key person insurance for his CFO, head estimator, and the heads of his roofing and paving businesses, seemed like a good idea. “If anything happened to these people it would affect the business, no doubt,” he says.

 

Belt says in the event of a death, proceeds from the policies would be used to buy out the ownership stake of his shareholders, and then finance the search for a replacement. Since he elected to buy policies that accumulate a cash value that he can tap into if needed, he views the insurance as a sort of “forced savings account.” Still he says, “You never want to think about anything bad happening to these people you depend on, but you have to be ready just in case.”

Insurance.pngInsurance is often an overlooked priority for small businesses due to cost considerations and the complexity of the coverage landscape. Different types of insurance have confusingly similar names.  Your state, town, or county may have its own insurance requirements and many industries have coverage specific to them. In fact, the Insurance Information Institute estimates that about 40 percent of small business owners carry no insurance whatsoever.

 

All enterprises need to protect themselves from the impact of unforeseeable events on property and revenue. For small businesses in particular, who tend to have limited economic safety nets, investing in insurance is truly a case of “an ounce of prevention is worth a pound of cure.” While premiums can be somewhat expensive, the cost of operating without insurance can prove to be much more extreme. Fires, accidents and litigation are just a few examples of adverse events that can put your company out of business or into severe debt and threaten your financial security and livelihood.

 

Understanding Your Options


The first step to navigating the potentially daunting world of insurance is educating yourself about available alternatives. Insurance policies can insulate companies from a myriad of risks ranging from property damage to management negligence, but broadly, they fall into these areas of risk.  

 

  • Liabilities
  • Property
  • Business assets and equipment
  • Employee related


It’s useful to look at these categories as a framework for understanding which insurance policies may be most relevant for your business. As you conduct your research, your county or city clerk’s office, state insurance office, and/or local chapter of your industry association or chamber of commerce could serve as valuable sources of guidance and information.

If you decide to seek assistance from a professional, the following are a few recommendations to help you identify the right agent or broker partner for your business:

 

  • Understand the difference between an agent and a broker – Whereas a broker is independent and sells for a multiple companies, an agent typically just represents one product or company. There are relative advantages and disadvantages to each. While brokers can offer more choices, agents tend to have more leverage to make plan changes. Moreover, brokers are generally paid on commission by the insurance company, which could be reflected in the premiums. Agents, on the other hand, are normally paid by the insurers, so the business is not charged for their services.

 

  • Seek referrals from companies similar to yours in size and scope – This will help you identify candidates who are most likely to be knowledgeable about the types of products you may need and who will be experienced in working within your scale and budget parameters.

 

  • Check licenses, registrations and disciplinary records – This information can usually be obtained from your state insurance commissioner’s consumer hotline. You may also want to consider conducting an internet search.  Insurance Pull Quote.png

 

Types of Coverage


Though not exhaustive, the list below provides a sweeping overview of insurance alternatives you may want to consider. Prioritizing which policies are most pertinent for your business will involve determining the size of financial commitment you are comfortable making, assessing the needs of your particular operation, and identifying any state or professional requirements. Once you decide on a plan, review it annually with your agent or broker to make sure it remains relevant to your company’s needs.

 

Liabilities

  • Business Owner's Policy (BOP) generally provides coverage for property (fire, wind, theft, etc.), liability (injury of someone in your business or by your product), business interruption, and, in some cases, workers' compensation. The components of each BOP are different, so be sure to confirm that your policy contains all the requisite provisions for your business’ needs. It is important to note that if your company has more than 50 employees, or very high-sales volume, you may not be eligible for a BOP and will have to purchase a package with the same elements at higher limits.

 

  • General Liability Insurance covers personal injury or property damage that occurs on your premises, like a customer tripping in your store and breaking a leg. Similarly, this policy would kick in if you accidentally broke an expensive vase while visiting a client at his/her facility.

 

  • Product Liability Insurance protects against harm to a user or user’s property stemming from a design flaw in a product (defined as anything tangible that can be touched, used or consumed) you manufacture and/or distribute. Many BOPs include limited product liability coverage but if the specific nature of your product runs an elevated risk of potentially inflicting harm (e.g. toys, food), you should probably consider purchasing a separate policy.

 

  • Professional Liability (Errors & Omissions) Insurance is the equivalent of product liability but for professional services. This form of coverage is required by law in some states and for certain professions (physicians, attorneys, accountants and realtors). Moreover, professional liability coverage is increasingly becoming a condition of bidding for computer consulting and government services contracts.

 

  • Umbrella Insurance becomes effective when you reach the limits of your primary liability policy.

 

Property

  • Property Insurance generally falls into two categories; building and personal property with the former covering damage to “real property” from such events as fire, lightning, wind, and vandalism and the latter protecting files, furniture, inventory, and equipment.

 

  • Commercial Automobile Insurance applies to cars, vans, or trucks used primarily for work purposes. If you use your personal vehicle for business but don’t regularly drive customers, most insurance companies will allow you to pay a little extra to extend your existing policy. It is important to note that if you travel with demo units, samples, laptops, etc. you should make sure either your auto, or property policy, covers potential damage.

 

Business Assets/Equipment

  • Business Income/Extra Expense Insurance is incorporated into most BOPs and reimburses business owners for revenues lost during downtime caused by property damage. So, if a part of your facility experiences a fire, the business income component will compensate you for earnings missed while you could not occupy the building while the extra expense portion would help with the costs of leasing temporary space.

 

  • Extra Equipment Coverage is a supplemental policy or rider to other insurance that provides an extra layer of protection for critical computer equipment. If considering this type of policy, you may want to consider a plan that also includes loss of data and breakdowns and failures caused by power surges, etc.

 

Employee-Related

  • Health insurance has been the focus of considerable debate and concern given the proposed reform mandates. As costs rise and the economic environment remains challenging, many small businesses are cutting back on healthcare coverage. In fact, according to the Kaiser Family Foundation research, approximately half of small businesses offer a health plan versus 99% of larger companies.

 

While healthcare costs are undeniably significant, the implications of foregoing insurance altogether can be devastating. For small businesses with limited staff, an illness or an accident can impede or even halt operations entirely. In fact, nearly half of small business employees believe that dealing with a health, or financial problem, affects their ability to get their job done. Therefore, before writing off health insurance as prohibitively expensive, we suggest that small business owners explore potential alternatives such as group insurance plans offered through trade and industry associations or even offering healthcare as a voluntary benefit to employees.

 

  • Disability Insurance will cover a portion of your gross income if an illness or injury prevents you from working. This is particularly important for very small companies (especially sole proprietorships) whose survival hinges on one or two key individuals.

 

  • Key Man Insurance is most relevant if the survival of your business depends on a critical employee. In the event of illness or death, it would replace the income that this person generated and/or the cost or replacing the functions he/she performed.

 

  • Workers' Compensation Insurance is mandated by law in most states and is designed to help employers control liabilities when an employee is injured at work and pays for medical expenses and lost wages.

 

  • Employers’ Liability Insurance is generally required for any business with more than one employee and shields your business from monetary damages and/or legal fees arising from lawsuits brought by employees or their relatives for work-related injuries or illnesses.

 

Entrepreneurship is the fine art of balancing risk and optimism. Insurance is a vital tool for mitigating vulnerabilities created by unexpected events and preventing the risk portion of the equation from weighing down opportunities and ultimately the future of the enterprise.

SBC Team

Legislative Update

Posted by SBC Team Apr 21, 2010
What do the recently passed Health Insurance Reform and Jobs bills mean for my small business?

By Reed Richardson

Within the past month, Congress and the President passed two pieces of legislation-one minor, one major-that have elements specifically targeted at helping small businesses. But few entrepreneurs have the time to sort through legislative bills to find out just what the potential benefits are and when they might kick in. So, we've done it for you. Here, in nuts and bolts form, are ten frequently asked questions--with answers-regarding the new jobs and health insurance reform bills.

JOBS BILL

How does the new jobs bill encourage hiring and what time period does it cover?
The official name of the bill says it all. The HIRE-Hiring Incentives to Restore Employment-Act provides $17.6 billion in tax incentives to encourage businesses both large and small to hire an estimated 250,000 new employees by the end of this year. And because the bill was drafted in early 2010 but not officially passed until mid-March, its provisions were made retroactive a few weeks, so any new employees that meet the bill's qualifications criteria and were hired between February 3rd, 2010 and January 1, 2011 are eligible.

What are the hiring qualifications mandated by the jobs bill?
There are a few, but they aren't too onerous

  • First and foremost, the HIRE Act is primarily geared toward helping the unemployed, so for a new employee to qualify your business for incentives, he or she can't have worked more than 40 hours in the previous two months. (The new worker must sign an affidavit attesting to this. For an example of this IRS form, go here* http://www.mcguirewoods.com/news-resources/publications/taxation/Form%20W-11%20Draft.pdf
  • To prevent employers from gaming the system through zero-sum rounds of layoffs and hiring, the HIRE Act does not grant incentives to businesses that use new hires to simply replace another employee. However, a new hire would qualify if he or she replaces someone at your business that left his or her job voluntarily or was fired for cause.
  • Jobs bill credits are also available to employers who bring back former employees that your business previously laid off.
  • Adding your brother, mother, or daughter to your company payroll won't earn you anything other than smiles at the next holiday get-together, however, as family members of a business owner do not qualify.
  • Household domestic workers and independent contractors do not qualify either.

To see a handy sample worksheet of HIRE Act employee qualifications online, go to http://www.eidebailly.com/Services/Tax/documents/HIRE%20Act%20New%20Hire%20Certification.pdf

What exactly are these hiring tax incentives and how quickly do they work?
The incentives are two-fold. One incentive returns savings to your business almost immediately, while the other can't be realized until you file your 2010 taxes next spring.

  • The first of these financial incentives involves a tax holiday on the employer's share of a new employee's 2010 Social Security taxes. This equates to saving 6.2 percent of salary per new employee, up to the FICA tax wage cutoff of $106,800. Perhaps most importantly, businesses that qualify for this incentive would start to realize savings at the first payroll period after hiring and through the remainder of the new employee's tenure at the company or until the end of 2010, whichever comes first. All told, this incentive offers employers a maximum savings of $6,621 per new employee hired in 2010.
  • The second incentive, which is aimed at rewarding permanent rather than short-term hires, involves giving businesses tax credits for every new employee hired in 2010 that remains on the payroll for at least 52 consecutive weeks. The tax credit amount can vary somewhat based on the new hire's salary, but for the overwhelming majority--those employees that earn more than $16,129 in gross annual salary--the credit to the business will be capped at $1,000 per new employee.

So, for example, if your small business hired a new employee on April 1, 2010 at an annual salary of $40,000 and they remained there through next April, your company would save $1,860 on Social Security taxes during this year and could then claim an additional $1,000 tax credit next spring. (To check out the online HIRE Act tax savings calculator here: http://www.paychex.com/hireact/

I've heard a lot of different dates regarding the new health insurance reform law, when does it take effect?
It depends. Some of the more complicated elements, like the new private health exchanges and the additional surtaxes on high-end health-care plans won't kick in for several years, while many other parts, like the bans on coverage rescissions, coverage denial for pre-existing conditions, and annual and lifetime dollar-value limits, begin in September of 2010. A few elements, including a new high-risk insurance pool and substantial tax credits for small businesses that choose to provide health care to their employees, became effective immediately upon the bill's signing in late March. (For a more comprehensive rundown of which health insurance benefits begin when, check out http://www.cbsnews.com/8301-503544_162-20000848-503544.html?tag=contentMain;contentBody

How do the small business tax credits that start this year?
Starting in 2010 and running through 2013, very small businesses-those that have 10 or fewer employees with an average salary of $25,000 or less-can qualify for a tax credit equal to 35% of their employee health care contributions to help the business either continue or start up health care coverage for their workers. (The business must pay at least 50% of the cost of the health care premiums). Small businesses in the next tier up-those companies employing between 11 and 25 workers-will be eligible for partial credits on a sliding scale during the same period, up to a maximum average employee salary of $50,000. http://www.whitehouse.gov/health-care-meeting/questions/small-business-6

Does this mean my small business will have to start providing health care to my employees by the end of this year whether I can afford it or not?
No. While the incentives put in place by the health insurance reform bill are meant to encourage all businesses, both small and large, to transition to providing health care to their workers over the next four years, providing health insurance will not become mandatory until 2014. Then, even after the state insurance exchanges start up four years from now, small businesses with fewer than 50 employees will be exempt from the mandatory health insurance rules. However, it's worth pointing out that the reconciliation portion of the health insurance reform bill, passed a week after the main bill, stipulates that part-time workers will also be counted toward the 50-employee threshold on a pro-rated basis by hours worked. So, a small company with just 30 full-timers but dozens of part-time hourly workers still might be required to offer health insurance or be subject to the annual per-employee penalties.

I've heard a lot about these penalties and am fearful about their potential impact to my small business's bottom line.
Again, these penalties wouldn't kick in for four years, and if your small business doesn't meet the minimum-size requirements of 50 full-time equivalent employees, it will still be immune from having to paying the $2,000 per-employee annual penalty after 2013. If your company does surpass the size threshold by 2014, the new law temporarily deducts your first 30 workers when assessing this penalty to mitigate somewhat the potential financial burden. This means a small company with 51 FTE workers that chooses not to offer health insurance starting in 2014 would pay an annual penalty of $42,000 (21 assessed employees x $2,000 fine each). In addition, some high-cost/high-benefit "Cadillac" health plans-those that cost more than $10,200 a year for individuals or $27,500 for families-will be subject to a 40% tax on the portion above the limit, but that provision won't kick in until 2018. While the insurance companies, rather than individuals or businesses, will pay this surtax, higher premiums on these Cadillac plans could very well end up affecting the latter.

So, in four years, is my growing small business going to face an unpleasant choice between unaffordable health insurance and steep annual penalties?
It's too early to tell. The stated goal of the new health reform law is to build more affordable health insurance options so that by 2014, when the individual mandates and penalties are put in place, small businesses will be less dramatically affected because they will be able to find health insurance through a new private exchange that is both affordable and works for their employees. To further ease the transition, once the new private state health exchanges start up four years from now, the small business tax credit for health insurance rises from the current level of 35% up to 50% of employee contributions for the first two years. In addition, each state must also set up a health insurance exchange specifically aimed at smaller companies--known as Small Business Health Options Programs or SHOPs--where those businesses with fewer than 100 employees can pool their resources together to strengthen their buying power when shopping for coverage.

I'm self-employed, how will the health insurance reform affect my health coverage?
If you're currently uninsured, you should know that starting this year the new reform law establishes a temporary, high-risk insurance pool for the self-employed as well as small business employees without employer insurance. This new exchange will allow those who have pre-existing conditions or who have had a lapse in coverage for more than six months to gain access to full insurance coverage. In addition, the reform law will provide small businesses and the self-employed access to a new, simplified cafeteria-style health coverage plan with tax-free benefits.

What about the impact on the personal finances of small business owners and the self-employed?
As for the potential effect on the personal finances of the self-employed, its impact could vary widely. Starting in 2014, the new law's individual mandate will asses a penalty on individuals who can't provide proof of health insurance on their annual income taxes. However, low and middle-income self-employed individuals will be eligible for significant tax credits, scaled along with income, to help cover these costs. So, for example, an entrepreneur just starting out who claims zero income in 2014 would be required to pay as little as 2% of his or her annual individual health insurance premiums, whereas an established self-employed business owner making $43,000 (or a family of four with a household income of $88,200) would be required to cover as much as 9.5% of his or her annual premiums. (A simple health insurance subsidy calculator can be found online here: http://healthreform.kff.org/SubsidyCalculator.aspx

For those individuals who still choose not to purchase health insurance starting in 2014, the annual penalty would start at 1.0% of taxable income that year, rise to 2.0% in 2015 and then hit 2.5% of taxable income by 2016. In addition, all individuals earning more than $200,000 in a year or those making more than $250,000 annually in total household income, would be subject to slightly higher Medicare taxes to help defray the cost of the program's new incentives and subsidies. In addition, individuals and families in this same income category would be subject to a 3.8% surcharge on income-generating investments like bank interest, dividends, capital gains, and rent.

Though their profession isn't always the most popular, business attorneys offer a range of critical services for small business

 

By Morin Bishop

 


There are a host of reasons why small business owners might be averse to consulting an attorney. First, of course, there is the sometimes negative view the American public holds of the legal profession in general. Fairly or not, many Americans just don't trust lawyers. Second, there is the natural tendency of independent-minded entrepreneurs to want to go it alone, to figure out how to get things done themselves, and to reject the very notion that one needs to rely on a class of experts to manage one's business. Finally, there is quite simply the fact that lawyers cost money, sometimes a great deal of it, and for many small business owners faced with the ongoing challenge of meeting payroll and covering all their other basic business expenses, spending much needed capital on a lawyer might seem unnecessary, if not downright wasteful.

 


All of these attitudes are entirely understandable, but in many instances they are also downright wrong. If you're not consulting a lawyer in connection with the four fundamental areas discussed below, you are courting disaster:

 


Starting your business

 


Though you may have studied the intricacies of the various corporate structures (C-Corp, S-Corp, limited liability, partnership, etc.) available to you as a budding business owner, it is highly unlikely that you understand them as well as a trained attorney, nor is it likely that you are entirely familiar with all the local, state, and federal regulations that may be relevant in your situation. Do you really understand all the tax implications of your preferred structure? And, even if you do, are you sure you understand specifically how to go about instituting it? Finally, although you may be confident on all these points, doesn't it still make sense to consult with a lawyer just to be sure of your answers? Of course it does-and the funds expended for such certainty represent a drop in the bucket when compared to the dollars you might be forced to spend if you choose the wrong corporate structure or fail to follow the proper rules in setting it up.

 


Signing on the dotted line

 


Your signature on a document of any kind can be a very serious matter. The longer that you are in business, the more you will begin to feel that you have in many ways signed your very life away. No one would suggest that you consult an attorney every time you sign a legally biding document, but it does make sense for you to get a lawyer's opinion on any significant contract you enter into, particularly one that involves any significant exchange of capital. In some instances, in consultation with a trusted attorney, you may be able to devise language that can become boilerplate for you and your company, and hence be flexible enough for use in multiple contracts. But anytime you depart significantly from the boilerplate, or engage in an agreement of an entirely different nature with a supplier, customer, or partnering firm, make sure you run it by your lawyer again. The person or entity with which you are entering the contract probably has consulted a lawyer, who is undoubtedly attempting to fashion the agreement in his or her best interests. Doesn't it make sense for you to do the same? It is far better to have your attorney involved at the front end, rather than discover later on that there is language in the contract you failed to properly understand or account for that now is causing you undue hardship. Finally, should a dispute arise over the terms of a contract, an attorney is absolutely essential to the process of negotiating an acceptable settlement. Avoid litigation and you'll save yourself a bundle of money.

 


People Problems

 


We live in exceptionally litigious times and few areas have spawned more lawsuits than that of employer-employee relations. It is also an area in which the law is in a state of near-constant flux, with new rulings being issued almost daily that alter the landscape and influence the range of acceptable conduct. Do you feel confident that you understand which questions you can and cannot ask when conducting a job interview? Do you know the best ways to protect yourself from a discrimination or wrongful termination action in the event you choose to fire an employee? Are you fully conversant with what constitutes sexual harassment in the workplace these days? In all of these areas, a lawyer's expertise is invaluable and can save you considerable headache, not to mention substantial expense. (A lawyer can also assist in the formation of an Employee Handbook, which may be a somewhat ambitious undertaking for many small businesses, but which can nonetheless offer substantial protection from many of the issues discussed above.) When in doubt at all about a firing, a hiring, or an episode in the workplace, call the lawyer. You'll be glad you did.

 


Final Stages

 


One situation in which most business owners are wise enough to hire an attorney is when they are considering a sale of their business, a closing of their business, or the passing on of their business to a family member or other successor. For a whole host of reasons, it is critical that every component of such a transaction is handled in such a way as to protect you and your assets in your exit as well as your successors or new owners in their entry. Any uncertainties or legally gray areas in the transaction are invitations to trouble, and oftentimes very serious trouble, in the future. When you leave your business, you want to do so with absolute peace of mind. Hiring a lawyer to shepherd you through the process is perhaps the single most important step you can take to bring about that most desirable outcome.

 


None of the above should be read as suggesting that there are not indeed unscrupulous, unethical, and incompetent attorneys, just as there are similar bad apples in the barrel of every profession. For that reason you should be most careful in how you select a lawyer to consult. Talk to fellow business owners, particularly ones facing similar challenges to your own, and ask for recommendations. Be sure that the attorney you choose has experience in dealing with small business and with the issues for which you are seeking his or her expertise. One size may not fit all, as one attorney may be more experienced and adept in dealing with contractual issues or with deals involving the sale of a business, while another may be far more experienced in dealing with employment and HR matters. Finally, be sure you have the kind of comfort level with your attorney that enables you to be absolutely frank in asking whatever questions are of greatest concern to you. A lawyer with whom you can establish that kind of a rapport is truly worth his weight in gold.

 


"Used properly, a business attorney is a cost-saving tool for your company," says F. Douglas Mileski, an attorney at Guran Lucow Miller PC, a Detroit-based law firm. "A business attorney answers questions specific to your business and lets you sleep better at night and stay focused on growing your business by day. As the old saying goes, an ounce of prevention is worth a pound of cure, and legal services are no exception. The cost of fixing a problem can far exceed the up-front costs of preventing the problem."

 


So go out and hug a lawyer today. You may discover that you've found the trusted confidant you've always needed.

 


While we strongly recommend word of mouth as the best route to finding the legal help you need, the following web site is not a bad place to start: http://smallbusiness.findlaw.com.

Preparing for the worst will keep you functioning at your best

 


By Max Berry

 


Every entrepreneur goes into business hoping for the best, but this doesn't mean you shouldn't be prepared for the worst. Whatever business you're in, there will always be a number of things that, at any given point, could go wrong. Developing a contingency plan-or several of them-will help you survive the bad times in minimum time and at minimum cost. It will also make your business stronger as you get back on track for more good times. Here are some important steps to take when crafting your contingency plan.

 


Seize The Opportunity

 

Small business owners are optimists by nature, so sitting around preparing for a disaster that may never occur might not seem like the most valuable use of an entrepreneur's time. But doing so provides a chance to gain a deeper knowledge of your business's strengths and weaknesses. Before you even identify the risks you need to safeguard against, get in the mindset that contingency planning will, through enhanced awareness of your day-to-day operations, only strengthen and validate the confidence you already have in what you're doing. With any luck, you'll never need to put a contingency plan into effect, but it won't hurt to know that you could.

 


Identify The Risks

 

Before you can develop a contingency plan, you'll need to identify the risks to which your business is vulnerable. Depending on where your firm is located, these could include natural disasters like fires, floods, or hurricanes. If you run a tech business, you may need to develop a plan for dealing with an IT glitch or data loss. And, in this digital world, information security should always be a priority. When making your list, include all possible incidents, no matter how unlikely they are to actually occur. Also bear in mind that, while huge natural disasters and sweeping tech breakdowns snag the lion's share of the headlines, most businesses are much more likely to suffer from "quiet disasters," like subtle economic shifts and small computer glitches, or internal issues such as the loss of integral employees.

 


Spread The Responsibility

 

If your business consists of several departments, you may want to let each department come up with its own contingency plan. Your IT department will face an entirely different set of potential setbacks than will your PR guru and will naturally need to address them in vastly different ways. Designate one person from each department to oversee the contingency planning, stressing that everyone who may be affected by a disaster-which is to say everyone at your company-should have a say in how it is handled. While each department is at work crafting its own plan, it will nonetheless pay for you to oversee the processes of each, checking in regularly and maintaining a clear picture of how all the plans will work together.

 


Assess the Risks

 

Each department should keep track of each its own responsibilities-both autonomous and shared-and make a list of everything that could go wrong throughout the process of fulfilling them. Working with the other employees from the department, the contingency leader can then rate both the likelihood of each setback and the potential damage it could do to business operations. This will provide a precise framework for each department's contingency plan and help you to prioritize which potential setbacks to address first.

 


Structure the Recovery

 

When envisioning your business's recovery from a particular setback, put down a series of milestones each department will need to reach, from the immediate aftermath of the incident through the eventual return to normal operations. Determine how you will deal with the event-both internally and with external parties like clients and investors-then determine the appropriate order in which to restore business functions. Name the employees who will be key to every step of recovery and make sure that each of them knows what their responsibilities will be. If possible, try to determine the total amount of time and money needed for recovery.

 


Test Your Work

 

Once each department has finished its own plan, review them all to see how they work together. Keep an eye out for overlap between plans; if two departments plan on handling the same task, decide which is best equipped to actually take on the responsibility. Once you've gone over all the plans and made necessary changes, provide time for interdepartmental reviews. Once each plan has passed this revision process, test them by simulating those crises you are able to simulate. The people carrying out functions in the test run should, naturally, be the ones that would carry them out during a real incident.

 


Revise the Plan

 

After you've tested your plan, record what worked and what didn't and make changes accordingly. In general, remember that a good contingency plan should be updated regularly. Every time you make a major administrative or structural change in your business, adjust your plan to account for it.

 


Handling an Actual Crisis

 

Don't panic. You've got a plan.

By Christopher Freeburn

 


Escalating premiums are forcing many smaller businesses that offer group coverage to scramble for ways to cut costs. These usually involve tactics that may be necessary to keep your business's bottom line healthy, but will likely prove unpopular with your workers. Start by cutting back on specific benefits, by eliminating dental or vision care coverage, for example. Alternately, you can consider increasing the co-payments employees must pay when visiting physicians and purchasing prescription drugs. Both measures will lower your plan's overall premiums.

 


Comparing plans

 


Of course, the single most effective way a small business can reduce costs is by shopping around for the lowest cost plan in the first place. "There are many health insurance providers out there," advises Todd McCracken, president of the National Small Business Association (NSBA). "Small business owners should consider a range of offers from as many companies as possible." Working with an insurance broker can bring you a much greater range of possible providers than trying to solicit offers on your own.

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Small businesses are increasingly a market courted by the major insurance providers, which have designed group health plans-HMOs, PPOs and POS plans-specifically to address the financial concerns of small businesses.

 


Additionally, you can reduce the percentage of the insurance premium you pay per employee. While most states have no legal minimum for employer premium contributions, some-California, for instance-require the employer to make some level of health insurance premium contribution. However, no state demands that a business pay more than 50 percent of the premium for each employee. In general, small businesses pay about 30 percent of an employee's individual premium, but there is no hard and fast rule about it.

 


Choosing the right plan

 


The first step in selecting the health insurance plan that best fits your company is to sit down and discuss the matter with your employees, says Mindy Ross, an independent insurance agent in Nassau, New Hampshire. "Ask your employees what sort of coverage they need-and how much of the premiums they will be willing to pay." Let them see exactly how much the insurance will cost both them and your business, Ross advises. "That way they will understand why you are choosing a particular plan, even if it might not be the one they'd like," she says. Ross explains that letting your employees know the high cost involved in setting up and maintaining their insurance can help soften the blow if you need to cut back on the plan or lower employer premium contributions later. "Most of the time, employees have no idea just how much their insurance is costing the company."

 


Stepping Outside a plan

 


Even after trimming coverage and reducing premium contributions, some businesses find the available array of health plans too expensive. But even if you opt not to obtain a group plan for your employees, you can still provide some form of health coverage. According to Section 105 of the IRS tax code, employers can reimburse employees for health care expenses. Under this option, a company decides, on an annual basis, to set aside a certain amount of money, which the employees use to purchase individual health insurance policies-or pay actual medical costs-on their own. The money allocated for this purpose is tax-free for the employee and tax deductible for the employer.

 


HSAs and HRAs

 


The dramatic escalation of health insurance costs has caused much pontification as well as some real action in Washington. In 2003, Congress created Health Savings Accounts (HSAs)-which went into effect in 2004-as an alternative to traditional medical insurance. HSAs are offered only in conjunction with a High Deductible Health Plan (HDHP). Sometimes called "catastrophic health plans," HDHPs generally cost a great deal less than traditional health insurance plans, but feature minimum deductibles for 2008 of $1,100 for individuals and $2,200 for families, with maximum out-of-pocket expenses of $5,600 for individuals and $11,200 for families. Though HSAs and HDHPs can be set up by individual consumers, they can also be offered through employers. If you offer an HDHP plan, all full-time employees must be treated equally under the plan. Deposits into employee HSA accounts are made on a pre-tax basis, with the maximum annual deposit being $2,900 for individuals and $5,800 for families. Funds deposited into HSAs are the property of the employee making the contributions and any unused funds are carried over from year to year and continue to earn tax-free interest on behalf of the employee. Funds in an HSA can be withdrawn without advance approval to cover any qualified medical expense, including deductibles for HDHP coverage and expenses not covered under the insurance plan, such as dental, vision, chiropractic services, and over-the-counter medications. Some HSAs offer a debit card to pay for such expenses, others offer checks or reimbursements; most offer a variety of ways to access the funds in the HSA. HSAs are fully portable, meaning the funds remain the property of the employee even if he or she leaves the firm or changes health plans.

 


Similar to HSAs are Health Reimbursement Arrangements (HRAs), which can be used in conjunction with HDHPs or other traditional insurance plans. An HRA is an employer-funded account that reimburses employees for medical expenses as they are incurred. The advantage to the employer is that such funds are expended only if they are needed, meaning that the healthy employee, who requires little or no care beyond an annual physical, will save the company money, making the HRAs of employees in genuine need that much more affordable. Unused funds remain the property of the employer. Major insurance providers have incorporated HSAs and HRAs into their coverage offerings, making it easier for small businesses to add them to their coverage options.
SBC Team

Disaster Recovery

Posted by SBC Team May 9, 2008
Don't be catch unprepared for the worst case scenario

By Chris Freeburn

A small business's survival can mean more than weathering the economy's ups and downs, or attracting consumer interest. Sometimes it means recovering from disaster. That disaster can come in the form of a fire that rips through your office, or the building housing it, a flood that soaks the business district in which your company is located, or a tornado or hurricane that batters your city. Such calamities can leave your business miraculously unscathed, moderately damaged but still functional, or reduced to ashes and debris. While such disasters are, thankfully, infrequent, planning for their possibility is something that every small business owners should do - before the unexpected happens.

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Insuring your company's survival
Choosing the right insurance to protect your business from potential disasters should rank alongside choosing a location or buying office equipment as critically important tasks. Unfortunately, too many small business owners are so intimidated by the prospect of having to wade through complicated insurance offers, coverage options, and the specter of high premiums that they put insurance decisions off, or simply follow the recommendation of their insurance broker - often without understanding the details of the coverage they end up receiving.

Many small business owners, on the advice of their insurance agents, purchase a general business-owners plan (BOP), which is a set of combined insurance policies designed to address the needs of similar type businesses that face the same kinds of risks. Generally, BOPs include coverage for property, business interruption, and liability. While these plans offer a general range of coverage mostly adequate for small businesses, it is important to make sure that they address your company's specific needs.

Property insurance will generally cover any buildings or equipment owned (or leased?) MKT1 by your business. But it is a good idea to review your coverage from time to time to make certain new equipment has been added to the policy. "One of the biggest mistakes small business owners make in regard to their insurance coverage is obtaining a general policy without ever reading through the details of the coverage," says Dave Bowman, chairman of TTG Consultants. "They assume that if they have property insurance, that means the insurance company will pay for any damage - no matter what caused it. That's a huge mistake." Make certain that your property insurance will cover any potential natural disasters that might strike. Many policies will not cover flood damage, or only do so under very specific circumstances. Does the area in which your business operates experience earthquakes? Brush fires? Hurricanes? Does the insurance policy cover damage from those specific events? What about damage resulting accidents or vandalism or other criminal activity?

Business interruption insurance can be a life preserver for any business. Many business owners understand the value of insuring their offices and equipment, but neglect to consider what will happen to the company's finances in the event the offices or equipment become unusable. If your business's location is destroyed, or rendered unusable by some disaster, will your insurance provide you with temporary income while you are getting back on your feet? Does it cover expenses related to operating from a temporary location or even relocation costs? If not, you might end up watching your business founder financially even if your property insurance completely covers the loss of your building or equipment. "Most creditors won't care that your business is shut down for a few days or weeks to recover from a fire, flood or other accident," Bowman says. "They expect to be paid on time because they have to pay their bills on time." Business interruption insurance will compensate you for the income lost while your business cannot make use of its property. This form of insurance covers the operating expenses and profits you would have generated during the period in question, based upon your existing business records. When reviewing your business interruption policy, make sure the coverage's time limit is reasonable enough to permit you to relocate and restart operations after the loss of your property.

While BOPs offered a good range of general protection, they do not provide coverage for other specific types of insurance, including health, workers' compensation, disability, automobile, and professional liability, all of which must be covered under other policies.

Extra expense insurance is another type of business insurance you may wish to consider. Related to business interruption insurance, extra expense insurance pays you a reasonable amount of money in excess of normal operation costs in order to speed your company's recovery.

Protecting your company's data assets
Having the right insurance will give you the financial boost needed to reassemble your office, repair or replace equipment, and give you enough funds to keep things going until your normal revenues pick up again, but insurance can't protect the one vital thing your business absolutely needs to get back on track - your company's critical data. Today, virtually no business, no matter how big or small can survive without the information stored on its computers. Consider for a moment just what information is stored on your company's hard drives: customer information (including purchase records, outstanding invoices, and account numbers) company tax records, employee records, your business plan, and all the daily records of financial transactions. Imagine trying to get your business up and running again if this information was irretrievably lost.

Traditional methods of backing up data
"The first line of defense against data loss is an automatic backup to a physical drive," says Boston-based data security expert Jim Mott. "There are many products that will perform automatic backups every few minutes or every hour, with absolutely no user intervention needed after setup," he adds. "But a surprising number of small businesses just don't take advantage of them."

Many small businesses choose to use an external hard drive as their primary data backup device because they are inexpensive and easy to set up (usually requiring nothing more difficult than plugging in a USB cable). External hard drives can be attached to individual machines, or to company networks, and most come with automatic data backup software. External hard drives offer protection if a network server or individual PC hard drive fails. Any disaster that heavily damages or destroys your office, like a flood or fire, on the other hand will likely destroy the external hard drive as well. Removable disk drives can guard against this possibility by backing up your company's data to high capacity data disks that can be removed from the drive and carried outside the business in emergencies, or even nightly. "Removable drives have come a long way," says Mott. The storage capacity of affordably priced removable disks now ranges from 50GB to 100GB, more than enough to preserve the data of most small businesses. As with external hard drives, most removable disks can be configured to automatically back up data on a periodic basis. "Of course, removable drives are reliable as a means of protecting data only to the extent that someone actually removes the disk from the drive before leaving the office," Mott cautions.

Online data storage
Once upon a time, only big companies with huge IT budgets could afford the luxury of transmitting their data for backup and storage in secure, remote locations. But the Internet has made this an option for even very small businesses. Online data storage is a rapidly growing field with both established names and newcomers all vying to store your company's data.

There are a number of benefits of storing and backing up your data offsite. Physical security is the best. If your offices are damaged or destroyed by fire, terrorism, or natural disaster, your critical business information will still be secure, miles away, whereas any on-site data storage device may not survive. Online storage also permits easier access to data, especially for companies with traveling representatives or multiple offices, without clogging up email systems or company servers with large files. Better still, online storage is far more easily expandable. No need to buy new equipment for the office and endure the disruption of installation if more storage capacity is required - simply purchase more storage space from the provider. Online storage also eliminates the need to maintain the storage devices or deal with technical issues on your own. Many online storage providers also offer software the automatically backs up all your company's data at set intervals, eliminating the chance of data loss due to forgetfulness. All your business needs is a high-speed Internet connection.

A number of other companies offer online data storage with similar services, including Verio (verio.com), Iomega (iomega.com), HyperOffice (hyperoffice.com), eVault (evault.com), C I Host (cihost.com) and iDrive (idrive.com). These companies offer a variety of data access, storage, and backup features at widely varying pricing structures. All offer secure, encrypted data storage and transmission and technical support.

Small business owners interested in storing their data online should make sure that the storage provider under consideration offers secure data backup facilities, preferably with their own security guards, fire protection, hard disk redundancy, and independent power supply in case of power failures.

Chris Freeburn is an associate editor/writer for Priority magazine
SBC Team

ARE YOU COVERED?

Posted by SBC Team Jan 22, 2008
Too many small business owners fail to purchase business insurance or do so without knowing the details of their coverage

Choosing the right insurance to protect your business from potential disaster should rank alongside selecting a location or buying office equipment as among the most critical decisions a business owner has to make. Unfortunately, too many small business owners are so intimidated by the prospect of having to wade through complicated insurance offers, coverage options, and the specter of high premiums that they put insurance decisions off, or simply follow the recommendation of their insurance broker often without understanding the details of the coverage they end up receiving.

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Many small business owners, on the advice of their insurance agents, purchase a general business owners plan (BOP), which is a set of combined insurance policies designed to address the needs of similar kinds of businesses that face the same kinds of risks. Generally, BOPs include coverage for property, business interruption, and liability. While these plans offer a general range of coverage and adequately address the needs of many small businesses, it is important to make sure that they address your company's specific situation.

Property insurance will generally cover any buildings or equipment owned by your business. But it is a good idea to review your coverage from time to time to make certain new equipment has been added to the policy. "One of the biggest mistakes small business owners make in regard to their insurance coverage is obtaining a general policy without ever reading through the details of the coverage," says Dave Bowman, chairman of TTG Consultants. "They assume that if they have property insurance, that means the insurance company will pay for any damage no matter what caused it. That's a huge mistake." Make certain that your property insurance will cover any potential natural disasters that might strike. Many policies will not cover flood damage, or only do so under very specific circumstances. Does the area in which your business operates experience earthquakes? Brush fires? Hurricanes? Does the insurance policy cover damage from those specific events? What about damage resulting from accidents or vandalism or other criminal activity?

Business interruption insurance can be a life preserver for any business. Many business owners understand the value of insuring their offices and equipment, but neglect to consider what will happen to the company's finances in the event the offices or equipment become unusable. If your business's location is struck by a disaster, will your insurance provide you with temporary income while you are getting back on your feet? If not, you might end up watching your business founder financially even if your property insurance completely covers the loss of your building or equipment. "Most creditors won't care that your business is shut down for a few days or weeks to recover from a fire, flood, or other accident," Bowman says. "They expect to be paid on time because they have to pay their bills on time." Using a calculation based on your existing records, business interruption insurance will compensate you for the income lost while your business cannot make use of its property. When reviewing your policy, make sure the coverage's time limit is reasonable enough to permit you to relocate and restart operations after the loss of your property.

While BOPs offer a good range of general protection, they do not provide coverage for other specific types of insurance, including health, workers' compensation, disability, automobile, and professional liability, all of which must be covered under other policies.

Extra expense insurance is one final type of business insurance you may wish to consider. Related to business interruption insurance, extra expense insurance pays you a reasonable amount of money in excess of normal operation costs in order to speed your company's recovery.

RESOURCES
Management Help -
A library of helpful articles on evaluating and purchasing business insurance.
www.managementhelp.org/insurnce/insurnce.htm
Insurance Information Institute -
Helpful information on types of business insurance, finding the right agent, and basic coverage issues.
www.iii.org/individuals/business/
Insure.com -
An online tool that helps determine what sort of coverage your firm requires based on size and type of business.
www.info.insure.com/business/smallbiztool.cfm
SBC Team

Love Your Lawyer

Posted by SBC Team Jan 2, 2008
Be sure you understand the critical role of a business attorney to your company's success

It's hardly a secret that some people dislike lawyers. It's also no secret that many of the same people end up hiring lawyers when things don't go their way. Small business owners are no exception. Hiring a lawyer means spending money, for one thing, and most businesspeople would much rather forgo any expense they consider unnecessary. Lawyers also tend to bill by the hour, which can sometimes lead to fairly high bills. This nettles many business owners who wonder if, in the absence of actual legal proceedings, they could handle things themselves and avoid helping an attorney's billable hours go up.

Unfortunately, small business owners who think they are saving money by trying to avoid hiring a lawyer may actually end up costing themselves far more in the long run. "Used properly, a business attorney is a cost-saving tool for your company. A business attorney answers questions specific to your business and lets you sleep better at night and stay focused on growing your business by day," says F. Douglas Mileski, an attorney at Detroit based law firm Garan Lucow Miller PC. Waiting until your business absolutely needs a lawyer when faced with an actual lawsuit, for instance is precisely the worst time to start looking for one, Mileski warns. "As the old saying goes, an ounce of prevention is worth a pound of cure, and legal services are no exception. The cost of fixing a problem can far exceed the up front costs of preventing the problem."

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Getting Started
Solid legal advice can guide a small business safely through even its earliest decisions. What is the best form of organization for the company? Sole proprietorship, corporation, partnership, or limited liability company? The answer depends on the type of business, ownership arrangement, as well as tax and regulatory considerations. Unless you are well-versed in the applicable local, state, and federal laws and regulations, an attorney may offer guidance that will be more than worth the price later on. Additionally, if you later choose to amend your company's structure, an attorney can guide you through the legal issues involved in satisfying all affected parties.

HR Headaches
As your business grows and you hire workers, an attorney can provide invaluable assistance navigating the complex and often confusing array of employment anti-discrimination laws that apply where your business is located. What questions can you ask a candidate during a job interview? What can't you ask? How do you protect yourself from a discrimination action or wrongful termination lawsuit? Having your attorney compile or review your company's employee handbook is also a good idea, since it will help protect your business long after the employees are hired.

Contract Concerns
If your business relies on critical contracts with suppliers, customers, or partnering firms, its important to have these contracts reviewed by a lawyer to make sure the terms protect your business's interests especially if they other parties have had their own attorneys review the contracts. Better to consult your attorney before signing the contract than to learn later about sub-clauses buried in the document whose implications you didn't recognize at the time. In the event a dispute arises between your business and other parties, a good attorney can be crucial in negotiating a settlement before anyone initiates litigation. Avoiding litigation will definitely save your business money in the long run.

Expansion
If your business is thriving and you find yourself merging or acquiring another business, there is a multitude of legal documentation that will need to be created and reviewed. A good lawyer will remove the bulk of this burden from a business owner, allowing you to concentrate on the actual expansion plans and how to successfully merge or absorb another business. As you grow, your lawyer can also actively review your current business structure, ensuring the LLC you started still makes sense if your company doubles in size.

Endgame
Finally, an attorney can also provide important assistance if you need to close down your business, helping to insulate your personal finances from any liabilities associated with the business's failure. On a happier note, if your business succeeds, an attorney can shepherd you through the sometimes complicated planning needed to create a good succession plan so that your business will continue to thrive long after you've left.

To start your search for a lawyer, it's good to ask other small business owners and get recommendations. This will help to ensure that you'll end up with someone who already knows the issues you'll likely be dealing with. There are also many legal services out there that can help with short team legal issues or standard legal documents. Prepaid legal services and companies like Legal Zoom can also be viable options for small business owners.
SBC Team

Thinking about Inc-ing?

Posted by SBC Team Dec 19, 2007
The new year is a good time to take another look at your business's formal structure

As the new year arrives many entrepreneurs find themselves wondering if their small business structure is the right one, both fiscally and strategically. So, to help you decide whether or not your company is ready to take the next step in terms of incorporation, we've prepared a quick primer on three popular business organizational structures.

Limited Liability Company (LLC)
Started nearly 30 years ago as a hybrid between corporations and traditional partnerships, LLCs have proven to be an increasingly popular strategy for small business owners. "Of the small businesses I advise, 80% of themend up as LLCs," says tax expert Anthony Mancuso, author of LLC or Incorporation? LLCs allow multiple owners of a company to directly pass through profits to their personal tax returns, as they would in a sole proprietorship or general partnership, while shielding their various personal assets from liabilities or debts incurred by the business. A simple Operating Agreement, which is filed with the state business authority, establishes the LLC and sets up the rules for governing the company as well as the rights and responsibilities of each partner, or "member." Two concerns to be aware of though-LLCs cannot, by law, exist for more than 30 years and most states require unanimous approval by all other members before one member can sell or transfer their stake in the company.

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C-Corporation
Converting your small business to a full fledged corporation may offer some distinct advantages. In addition, you'll find it easier to attract outside investors and one day sell off your business if you are legalized organized as a C-Corp. "Because of a corporation's built in structure and transparency, investment and venture capital groups are much more comfortable funding them," explains Mancuso. And he points out that "nobody goes public as an LLC." Contrary to popular opinion, incorporating doesn't turn running your business into an adminstrative headache. "The annual fees and paperwork involved are not a big deal," says Irwin Ruppel, a retired small business consultant from Aurora, CO. "They should not be the thing that scares a small business away from incorporating."

S-Corporation
Once a widely popular small business structure, S-corporations, which are similar to standard C-corporations except for a more relaxed tax structure, have fallen out of favor recently. "Nowadays, S-corporations are pretty much dead in the water," notes Anthony Mancuso. "Thanks to LLCs, the old conventional wisdom about S-corporations just doesn't apply anymore." This is because LLCs now offer both pass through of profits to your personal tax return and liability protection of personal assets without having to follow the stricter corporate governance rules required of a corporation.
The bottom line? For many small businesses, the LLC arrangement makes perfect sense. But if your business plan calls for a significant expansion, or the need for major capital assistance, or if you may be seeking a payout via a sale in the not too distant future, then becoming a corporation may be the right move.

ONLINE INCORPORATION RESOURCES
Incorporation FAQs
bizfilings.com/learning/incfaq.asp

General business structure/tax advice
score.org/cgi/ask_score.cgi

Small business incorporation resources/books
nolo.com

LLC/Incorporation fees, by state
corporate.com/state-fees.htm

Locate each state's corporate registry
nass.org/busreg/corpreg.html
SBC Team

Nothing But Coverage

Posted by SBC Team Oct 19, 2007
With costs rising in every category, insurance again tops the list of small-business woes.
By Reed Richardson

But carriers and small businesses can lessen the pain by getting creative. When Benjamin Franklin said, "In this world, nothing is certain but death and taxes," he obviously wasn't thinking about running a small business. If he had, insurance would have been right up there.

Many small-business owners treat insurance as a necessary evil, the annual visit to their agent ranking just under a trip to the dentist on the pain-o-meter. "It's one of the things you must have but don't want to deal with," says Pattie Harrington, co-owner of Standard Printing Company in Ypsilanti, Mich.

Even insurance professionals admit that updating policies each year isn't something small-business professionals are eager to do. "It's like going to the doctor for an annual checkup - people don't like to do it," observes John Hebden, assistant vice president at State Farm Insurance in Bloomington, Ill.

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One reason for the avoidance, of course, stems from the typical entrepreneur's uncertainty over just what kind of coverage a business needs and how much to buy - not to mention the constantly rising premiums. The typical owner of a small firm must choose from a range of coverage options - depending on the type of business, how it's set up, annual sales and number of employees.

Sorting all this out isn't easy. "The biggest issue is the lack of understanding of their insurance needs," says Vince Tizzio, president and chief operating officer of AIG's Small Business division in Berkeley Heights, N.J. "Small-business owners are consumed with running their companies and making the payroll, and they often don't have an appreciation of the value proposition that insurance can provide their company. A liability claim can put you out of business."

Because your business changes during the year - and therefore creates new or greater risk of exposure - you should revisit the coverage you have. What types of changes might trigger the need for more insurance? Consider these: a bookstore adds a second location, a dress shop acquires the inventory of a failing competitor, or one law firm merges with another.

But how much do you need - and what kind? One way to find out is by sitting down with your insurance agent. "We just watch what's going on with the business and try to make the best decisions according to the situation," says Harrington. "Our agent watches out for us, and she's very conservative."

In general, small businesses need four types of insurance:

Property. Covers the business's buildings and contents - including equipment and inventory - against fire, theft, lightning and other hazards

Liability. Protects against being sued for personal injury and property damage. Businesses that give any kind of professional advice also need professional liability. For companies that make or sell goods, product liability insurance protects the business against claims of faulty merchandise.

Personnel. Includes workers' compensation as well as employee health and disability.

Income exposure. Pays for losses due to business interruption caused by natural disaster, fire or other calamity.

Many small businesses purchase a "business owner's package," an umbrella plan covering liability, property damage, business interruption, auto, computer liability, crime and more. However, these "BOPs" don't cover certain other essentials such as employee health coverage, life insurance, disability or workers' compensation. These tend to be purchased separately. "The role of the agent is to tailor the coverage of the BOP to fit your business," says J. Howard Kucher, vice president for product development at Zurich North America in Baltimore.

In addition to this basic coverage, most small businesses will want some important extras not provided by some of the BOP plans. These include creditor insurance to pay off business loans, insurance to support a buy-and-sell agreement in the event of the owner's death and "key person" coverage to pay for costs the business incurs due to the unexpected loss of an employee with a special talent, business contacts or reputation.

Creditor insurance is life insurance on the owner; it ensures that the bank or lender is paid off if the owner dies. "It's relatively easy to see whether you have enough," says Mark Johnson, president of Johnson Insurance Consultants in Duluth, Minn., and a member of the board of the Life and Health Insurance Foundation for Education in Washington, D.C., an insurance information resource. "You take the amount of the line of credit and carry that amount of coverage." As the loan is paid down, the amount of life insurance decreases accordingly.

A buy-and-sell agreement is an arrangement the owner or partners in a business set up to cover what happens to the business if the owner or one of the partners dies. "It says you own a policy on me, and I own one on you," explains Johnson. "If I die, you get the proceeds of the policy on me to buy my stock, and my heirs get the cash when you buy the business."

Key-person coverage provides for both the lost revenues that would have been generated through the special talents of a hard-to-replace employee and the cost of finding a qualified replacement. "If this is a person who is well-known in the industry and can get certain contracts with his connections, you may want a key-person policy on him or her," explains Timothy G. Ruecker, president of Nirvana Inc., a financial services planning and consulting firm in Phoenix.

Similarly, a so-called silent partner who handles the management of a professional firm may elect to take out a key-person policy on the partner who is the front person (i.e., the rainmaker who brings in the business). It's not uncommon for small businesses to attract and retain certain key people by offering them a tax-deductible deferred compensation plan if they stay with the firm for a specified amount of time.

Power in Numbers

One way to trim the cost of business insurance is to pool your insurance needs with those of others in your profession or trade. For instance, a contractor signing up alone may pay exorbitantly for workers' compensation for his crew. But by joining forces with other contractors through an association, he can obtain cheaper rates. "We see many small companies trying to consolidate their need - in effect, joining together to put together a bigger wheel," says James Barrington, a business consultant in Stinson Beach, Calif.

That's the case with workers' compensation coverage, the cost of which has been skyrocketing in many states. To save money, many small-business associations are going the self-insurance route by putting the money they would have spent on workers' comp into a pool. They then draw on the pool to pay injury claims.

In the past, self-insurance was available only to large companies, but in the past five years, smaller businesses with fewer than 50 employees have been able to employ it. "They have to be careful how they design the plan and how they set up their stop-loss. But over the long run, this can be the least costly way to provide workers' compensation coverage," says consultant Johnson. "One small business with about 45 employees can do it."

Because workers' compensation benefits tend to be a routine and fairly predictable risk, self-insurance pools are relatively easy for groups of employers to set up. To supplement its self-insurance program, a group may purchase insurance for catastrophic loss above a certain limit. A stop-loss aggregate contract pays for losses over a specified dollar limit. A specific excess contract covers losses over a stated limit per accident.

If, for instance, a stop-loss aggregate is set at $125,000, the employer or small group is protected against total claims beyond that amount. The idea is that in years when claims fall below an expected threshold (say, $100,000), the company or group doing the self-insuring pockets the difference - instead of paying it to the insurance company.

Health Care: All Together Now

Small companies are banding together to make health-care coverage more affordable too. More small companies are obtaining coverage through membership with other groups of small businesses in, for instance, local chambers of commerce.

"Health care is definitely a hot issue with anyone who has a small business," says Herb Bivins, co-owner of Black Oak Books, a chain of three independent bookstores in the San Francisco Bay Area. With a preponderance of what Bivins calls "gray hairs" on the payroll, the company recently saw its annual health-care premium nearly double, to almost $100,000. Bivins and his co-owners are shopping for other coverage.

"Our medical insurance costs are up 35 percent this year, and our workers' comp is up 30 percent," says Bill Essert, owner of Wooden Window, an Oakland, Calif., company that manufactures windows. His firm is working with a trade group, Associated General Contractors of California, to start an alternative workers' compensation insurance program. The program, a captive-insurance model, is similar in some ways to self-insurance.

"We figure companies participating in this plan will be able to save up to 30 percent on the cost of their workers' compensation insurance," says Marti Stroup, safety, health and regulatory services manager for Associated General Contractors. The captive program, still being formed, is aimed at companies with sales of $5 million to $25 million, Stroup says.

Some small businesses are dealing with rising health-care insurance costs by offering different combinations of deductibles and coverage to employees. One way to do this is via a flexible benefits plan; employees can choose to pay more per month (and have a lower deductible) or take a high deductible and pay less each month for the employee portion of insurance fees.

"We are seeing this kind of flexible- choice plan as one way to help control rising health-care insurance expenses," says consultant Johnson. Because the company can set aside funds for these flexible benefit plans on a tax-free basis, these plans are especially attractive.

So maybe Ben Franklin would alter his axiom today and say that nothing is certain but death, taxes and creating new ways to keep insurance costs low.
SBC Team

Controlling Worker’s Comp

Posted by SBC Team Jul 29, 2007
Consulting with a professional to improve workplace safety can keep worker’s comp costs to a minimum
By Chris Freeburn

Mention the term “worker’s compensation,” and a shudder runs up the spine of many small business owners. Between the ever-increasing premiums and the indirect costs due to lost time and decreased productivity, expenses associated with worker’s compensation claims can now have a major impact on almost any small business’s bottom line. A sense of helplessness in the face of these rising costs is understandable, but, in fact, a whole new industry of ergonomic and safety consultants has arisen to assist small business owners in reining in their worker’s compensation costs.

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On its face, such an industry might seem unnecessary since, according to the Bureau of Labor Statistics, workplace injury rates are now at a record-low level—4.8 injuries per 100 workers in 2004—having dropped nearly 33 percent between 1997 and 2004. But during that same period, medical costs associated with those injuries increased at a clip of nearly 10 percent a year. All told, public and private worker’s compensation funds will pay out well over $100 billion this year in medical costs and lost-time wages for the more than four million injured workers. Even more alarming, business experts estimate that the total indirect costs of these claims, borne mainly by employers, could be anywhere from two to five times larger.

“The good news, though, is that 100 percent of these injuries are preventable,” says Shawnalea Shelly, an occupational therapist of 18 years who now counsels businesses on improving the productivity and safety of their employees. “Most of the time, if the employees had only known what not to do or actions to avoid, their injuries would never have taken place.”

Shelly, who works for the West Coast-based Therapeutic Associates, Inc., says that even for small companies with an established safety program, having an ergonomic consultant or occupational therapist come in and review your employees’ habits and actions often reduces injury rates by as much as 20 percent. If there is no pre-existing program, she claims the injury rate often drops 70 or 80 percent after a consultation.

These results typically cut across companies of every size and in every industry, but according to Shelly, small businesses, in particular, often fail to recognize their value. “Small businesses typically have a false sense of security,” she explains. “But just because they’ve never had a claim doesn’t mean there aren’t potential injuries waiting to be exposed two, five, or ten years down the road.” Additionally, Shelly notes that in many small businesses “people are quietly working with discomfort and aren’t being as productive as they could be, which often ends up increasing a company’s health care premiums because of higher utilization and more trips to the doctor.”

Still, Shelly acknowledges that for a small business owner on a tight budget the most important question is: What’s the return on my investment? “For a small company of 15 employees in an office, I would typically do a one-hour-long educational session with all the workers that runs around $500, coupled with 15-minute ergonomic assessments of each individual employee and their workspace at a rate of $200-an-hour,” she explains. “Now, compare that roughly $1300 to the typical employer costs associated with just a single worker’s compensation claim of carpal tunnel syndrome, which, on average, results in 31 missed workdays and close to $10,000 in indirect costs like lost time, decreased productivity, and lowered morale.”

Of course, before hiring any ergonomic or injury prevention consultant, it’s imperative that you perform the same due diligence you would with any other vendor. Shelly recommends only using firms that employ both industrial engineers and occupational or physical therapists. “You’re looking for somebody that not only has some kind of workplace safety certification but clinical background and experience, too,” she notes. “But don’t be afraid to ask what other clients they’ve worked for and what experience they have in your particular industry, as well.”

To find a list of reputable companies, a good place to start would be the websites for the National Safety Council, nsc.org, as well as the Board of Certified Professional Ergonomists, bcpe.org, and the American Physical Therapists Association, apta.org.

 

Chris Freeburn is an associate editor/writer for Business 24/7 magazine.

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