Image by Gino Crescoli from Pixabay

By Michelle van Schouwen

So many articles and books have been written about attaining small business success or creating an exponentially successful company. Alongside these laudable goals should be another, less aspirational one: Don’t lose your shirt.

Small business failure is very common. According to Bureau of Labor Statistics, while some 20 percent of small businesses fail during their first year, and 45 percent by the fifth, by the tenth year, only 20 percent are left standing. Survival rates differ by industry. Losing a business can be bad enough, but even worse is to lose your own assets or security – investments, bank account, house, or car – as well.

While owning a business always entails financial risk, you can take steps to assure that your company’s potential financial problems don’t sink you as well. Please note that the tips provided in this article are not legal advice. For legal advice, work with a trusted attorney.

-Separate yourself from the business entity. Choose a business format such as a limited liability company (LLC) or a form of corporation that creates a financial line between you and the company. A good business attorney and certified public accountant can both help in making the right decision.

-Even with a legal business entity in place, an owner can potentially “pierce the veil” by mixing company and personal assets or liabilities, and thus still be in a position where a creditor can come after personal assets. One of the more common ways a small business owner can do this is by improperly mixing company and personal assets, especially if it is arguable that the company is merely an alter ego of the owner. Check to see how your state defines “piercing the corporate veil.”

-Business borrowing can be a minefield for small business owners. Often, a bank will want a “personal guarantee” from the business owner before granting a loan to the company. Do not take this lightly. Even if your company should fail, you will be required to pay back the full balance of the loan. If you can’t make the payments (whether the business is open or not) the bank will have the right to come after your personal assets, including your money, home, or vehicles. Think twice before signing a personal guarantee.

-Business office or plant leases often come with similar risks. Many landlords want a personal guarantee. They may also demand a long lease period. I recommend not accepting a personal guarantee clause, and insisting on a provision that your company can end its lease at any time with three or six months notice.

-Do not continue to hold onto employees you cannot afford (especially in slump times). It’s painful to let good employees go, but borrowing money (or not paying yourself) to keep them on is imprudent.

-Monitor expenses closely even in the best of times. Do not increase costs unnecessarily in flush periods, or you may have to cut them drastically in slow ones. Discretionary expenses to watch out for may include expensive vehicle leases, high-end office furniture or non-essential equipment, unsustainable benefits programs, regularly scheduled bonuses (as opposed to “unscheduled thank you” bonuses), and more.

-Depending on the nature of your business, you may experience substantial ups and downs in income. If this is true for your company, do not increase your personal costs of living to match the best of times, in the event that you need to rapidly retreat from that spending later.

-Measure, track, monitor, budget. Know all your numbers intimately. Review income, expenses, assets, and liabilities weekly. Do not delegate this responsibility. This way, you will be better able to spot trends before they hurt your business – and your own financial wellbeing.

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Michelle van Schouwen is principal of Q5 Analytics, providing advocacy and communications for climate change mitigation and adaptation. For 32 years, Michelle was president of van Schouwen Associates, LLC (vSA), a B2B marketing company. In 2017, she sold vSA. Michelle is available for speaking engagements on topics including her work on climate crisis mitigation and Florida coastal water issues. She speaks to business and student groups about marketing launches and entrepreneurship and works with start-ups to support their development.