7 Small Business Risks You Might Not Know You're Taking
Running a small business is often about taking and managing risks. Market risks are normal but business and tax risks are another thing altogether. Most business and tax-related risks can be managed as long as you know about them. Here are seven business risks you will want to make sure you have covered. 1. Best Choice of Entity
Are you operating as a corporation, limited liability company, partnership, or sole proprietor? More importantly, is the entity you are operating under providing you with the greatest tax benefits and separation from personal liability? Have you considered the tax consequences of selling your business based on its current structure? If not, you might want to explore the alternatives to make sure you're taking the amount of risk that's right for you. Reach out to ECS if you would like more information about the benefits and risks associated with each type of entity, and the tax implications associated with changing your corporate structure. Whether you're a new business or ongoing, we can help ensure you have the information necessary to select the best entity type for your business. 2. Employees or Contractors
Are your team members properly categorized when it comes to the IRS's rules about employee and contractor classification? Unfortunately, it's not about what you and the people you hire want. The IRS has very specific guidelines and rules to make that determination, so if you decide to hire contractors and the IRS determines they are employees, you could owe back payroll taxes that can cripple a small business. So you'll want to do the right thing upfront and make sure you and the IRS are in agreement. 3. Insurance
Having appropriate insurance coverage is a must to protect yourself from possible losses through a disaster, theft, lawsuit, or other incident. There are many types of insurance to choose from, and you'll likely need more than one. At a minimum, you should consider the following coverages:
Business property insurance, renters insurance, or a homeowners rider to protect your physical assets;
Professional liability or malpractice insurance, if applicable, to protect you from professional mistakes including ones made by employees;
Workers compensation insurance, to cover employee accidents on the job;
Auto insurance, or a non-owned policy if employees drive their own cars for work errands.
You may also want personal umbrella insurance, life insurance, and health and disability insurance. Check with an insurance agent to get a comprehensive list of options. 4. Sales Tax Liability Are you sure you're collecting sales tax where you should be? Nexus is a term that describes whether you have a presence in a state for tax purposed. Having an office, an employee or contractor, or a warehouse can extend nexus so that you'd need to collect and file sales tax for those states. States have become very aggressive in enforcing sales tax rules and have been sending auditors across state lines to determine if taxpayers are collecting and remitting the appropriate taxes in every jurisdiction where they have nexus. If your business involves the sale or lease of goods, chances are you have a sales tax filing responsibility, and if you're not abiding by the rules of each state where you have nexus, it's only a matter of time before an auditor comes calling. Please check with your contact at ECS, we can help determine where you have nexus, and assess your potential liability. ECS handles sales and use tax in every state and many local jurisdictions throughout the US, so we are an excellent resource for you. 5. Underpricing
Many small businesses make the mistake of underpricing their services, especially when they start out. If you start out that way, it's awfully hard to catch up your pricing to a reasonable level without losing existing customers. Knowing the right price to charge can make the difference between whether a company lasts a few months or many years. You can mitigate this risk by enlisting cost accounting assistance to help you calculate your margins and determine how well you are covering your overhead and maximizing profit. 6. Legal Services
Legal services can be expensive for a small business, so owners are many times tempted to cut corners and take risks. Attorneys are needed most when it comes to setting up your entity, reviewing contractual agreements such as leases and loan agreements, settling conflicts, advising on trademark protection, and creating documents such as terms of service, employment agreements, and privacy policies. Just one mistake on any of these documents can be costly, so if you choose to act as your own attorney, be sure it's worth the risk. 7. Accounting Services
With the abundance of low-cost accounting software options available, many small businesses assume the task of doing their own accounting, payroll, and income taxes. While it is a great idea to manage your general ledger in-house, wrapping up year-end reconciliations, payroll reporting, and income tax returns on your own can be risky. If they are done wrong or are incomplete, you could end up overpaying taxes without realizing it. Reaching out to a firm like ECS for year-end assistance is easier and more affordable than you may think. And the peace of mind it provides is priceless! How did you do with these seven risks? If you need to reduce your exposure in any of the areas above, or would simply like to consult a professional for more guidance, feel free to reach out for our help. ECS Financial Services is a full-service accounting firm helping businesses succeed since 1962. Our accounting and tax professionals are committed to delivering Exceptional Customer Service at every step. We'd be more than happy to carefully review these areas of risk with you to identify simple ways that you can minimize your business risk.
About the Author - ECS Financial Services' shareholder, Tobey Wilson, is a Certified Public Accountant (CPA) and Certified Lease and Finance Profession (CLFP). He joined ECS Financial Services in 2002 as an accounting intern, after receiving his bachelor's degree from Indiana University. Tobey became an ECS shareholder in January 2015. Tobey's expertise includes financial statement compilations, reviews and audits, ERISA audits, financial projections, business and personal tax preparation, and management consulting, as well as personal and corporate tax planning. Tobey likes working at ECS because he enjoys the people and feels they are like family. Tobey is active in his church, where he holds the position of Treasurer, and he enjoys spending his free time with his family traveling and visiting presidential museums and homes. Their goal is to visit every state!