Eryn Slagle, a senior at the University of Minnesota, assisted in the writing of this article. When starting and operating a small business, it’s important to adopt best practices that will help make your business successful, profitable, and to avoid conflict and disputes. In today’s article, we will cover Best Practices #1-6, and in a later article, we will cover Best Practices #7-12.
Best Practice #1 – One of the most important steps when starting a business is to form a limited liability entity, such as a corporation or limited liability company (LLC). By doing so, you create a liability shield between you and the potential liabilities that may arise in the operation of your business. It’s the best way to protect yourself, your family, and your personal assets. A limited liability entity must be registered with the Minnesota Secretary of State, and to maintain and keep the entity in good standing, you must file annual renewals. It’s also very important to complete annual meeting minutes, segregate financial accounts, and maintain other company records.
Best Practice #2 – Avoiding disputes with your business partners is essential to keeping your business running smoothly now and into the future. A great way to help avoid disputes is to put written agreements in place that define and describe your business relationship with each other. Agreements among business partners should address contributions, ownership percentages, how profits and losses are shared, and the allocation of roles and responsibilities. Putting in place buy/sell terms is also important in the event something happens to one of the business partners that puts the ownership of the business at risk.
Best Practice #3 – Using a standard agreement with your customers and clients is a good way to prevent disputes. Such an agreement should set expectations with customers, establish price and terms, scope of work, timelines, create an enforceable contract, preserve remedies such as mechanic’s liens, limit remedies, and put a cap on potential liability.
Best Practice #4- Employment disputes can be headed off by developing clear company policies on hiring, benefits, PTO, termination, and other HR matters. These policies can be outlined in an employee handbook, and managers should be trained on how to follow these policies in a fair and consistent manner.
Best Practice #5 – Preventing threats to profitability is important, and developing internal controls as a best practice will help protect the finances of the business. A business should develop standard billing, A/R, A/P, payroll, and other bookkeeping practices. A business should have its own bank account. Business and personal funds should never be co-mingled. It’s also important to build in checks and balances as a way to review the financials on a regular basis, and these include reviewing bank statements, credit card statements, separating duties between employees and the owner, and also having a formal audit completed by your CPA or tax advisor.
Best Practice #6 – Adequate and appropriate insurance coverage is very important to protecting your business. You should have a good, working relationship with your insurance agent, so have someone to go to with questions or concerns. When considering coverages, think through what your biggest risks are, and make sure you have coverage for those risks. It’s also smart to complete an insurance review every year to assess what your current needs are, make sure you have coverage, and to gain a better understanding of the policies you have in place.
We hope these Best Practices #1-6, as part of our ‘Top 12 Best Practices’ series, help you build a foundation for your small business. Remember to look for a future article covering Best Practices #7-12. In the meantime, if you have questions or seek additional information about small business best practices, please consult your business law attorney, tax advisor, lender, financial advisor, or insurance agent.
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