The small business owner, or the entrepreneur, faces many challenges that are unique in the business world. When planning your risk management strategies, and deciding on the types of liability insurance coverage you are going to need, it is best to see what is available to you. Generally, there are only a couple of viable business structure options for you. There is the sole proprietorship and the Limited Liability Company. Both are viable business structures but they are also fraught with potential risk.

• Most entrepreneurs and small business owners operate as sole proprietorships when they first start out. It seems the simplest structure for where they are. You and your business are inseparable. You are the business and the business is you. One of the major risk management factors in this is that it takes a small amount of capital to get up and running. Such small capital requirements will lower your initial risk.
• Preparing your taxes and managing your income is easier than if you held a corporation status. Again, the risk here is that there is no legal separation. The most difficult aspect to this would be your tax liability. Most sole proprietorships generally are a 1099 situation in addition to a Schedule C. A bit time consuming but far easier that filing as a corporate entity.
• The major risk management factor that must be considered is from a liability standpoint. You must get liability insurance to cover the risk you are in as a sole proprietor. Since there is no legal separation, your personal assets and finances are intricately linked to your business entity. Your risk and insurance advisor will be able to assist you in regard to proper liability coverage needed for your special situation.
• Two other risks facing you with this business structure is that it will be almost impossible to raise capital and you will not have a formal financial structure. Investors do not take sole proprietors seriously and an absence of formal financial accounting can quickly lead to business and personal disaster.
• The next level up from this is the Limited Liability Company (LLC). The major mitigation of risk here is that you and your business are separate entities. An LLC can also lower risk by having several members to bring in revenue and absorb the risk. In addition, the LLC provides the flexibility to distribute revenue in any way they see fit.
• One risk management factor that cannot be ignored is that, as an LLC, you are no longer risking your own personal assets and accumulated wealth. You, or the other members, are not legally liable, personally, for the actions, or the debts, of the LLC. A final advantage is that you will not be taxed twice.

In the end, however, it is what is advantageous for you. Your risk and insurance advisor can meet with you to discuss your business structure options. In addition, you will be able to calculate the risks and try to mitigate them through effective strategies and with certain insurance coverage.