In the previous post, we had discussed risk mitigation and given you a short introduction on how you can manage risk for your small business. Following up on the discussion, let’s move on to the next type of risk that you can mitigate by buying shelf companies.
In case you missed, check out the part 1 of Mitigating Risk Through Shelf Corporations
Every business has some critical person/s without whom it cannot function. What happens to this business if something occurs to these persons? Large companies always ensure that they have a succession plan along with continuity protocols, to ensure that the company continues to run, even if something happens to the promoters. They also ensure that they have a big talent pool that is ready to assume responsibility, in case there is a gap at the top.
Small businesses usually do not have the resources- both human and financial to execute such a plan. Here is what you, as a small business owner, can initiate to minimize this type of risk.
Purchase a key-man insurance policy that provides financial compensation to you or the nominees in case the key person of your business suffers from death or any physical or medical ailment that makes him or her incapable of working for the company. Thus, you can get some assistance and hire another person, in case you have nominated some other person as the key-man. If you have designated yourself as the key person, this insurance gives your family or your partners a fallback through which they can restart the business, in case anything happens to you.
Also read about how you can register your shelf corporation in the USA and save large amount of taxes : Save Tax- Register your Shelf Corporation in the US!
Bring in the family
The other way to reduce risk is to get someone in your close family involved in the business so that they can take it forward when you are not there. Thus, you can leave something for your family as well. We have seen that many business people get their spouses involved in operations, and that is a good practice if you can pull it off! For this, both of you must have common goals, and work in synergy towards these goals. You must also understand and trust each other to do the right thing, as, without trust, you cannot implement this measure.
Some people get their children involved in the business. They build sustainable family businesses that last for many decades through this method. Such a custom might seem old fashioned for a lot of you, but it does work. You can see this at play in the many Italian or Asian-owned businesses near you, as in those cultures, family plays a vital role in the life of any individual. Let us take a look at what makes this method tick.
An innate understanding of the business is often present in the next generation, as they have been observing their parents manage the company all through their lives. A sustained apprenticeship period under your guidance can help the next generation understand the nuances of the business. If you can manage the transition period well, and hand over the reins of the business smoothly, then you can create a sustainable family business as well.
Now we will try and see the ways through which shelf corps help in implementing this measure.
Suppose you have a shelf company in which you are the owner-director and authorized signatory, but you suddenly fall prey to a debilitating illness. Does your business come to a standstill? Who can operate the accounts? How will payments be made? In such a case, if you had decided on buying a shelf corp in your spouse’s name, then the business would have continued through that aged shelf corporation with credit facilities. Your spouse could have continued making payments through this subsidiary, thus giving a tremendous fillip to your business reputation. People in the trade will observe that your business does not default on payments to creditors, irrespective of the situation. You will find that people will want to trade with you, and you will get the most favorable terms out there, just because you dealt with adversity well.
Banks and financial institutions, if they find out about death or disease to the key person, might put a freeze on the credit limits of the firm. If you buy shelf corporations on sale and slowly build their credit profile, then you can even survive a credit freeze on your primary firm.
All businesses in the US work in a capitalist system. Thus, there are big booms in which everyone and their uncle make money! Then, there are crippling downturns when a lot of businesses go down, and only a few survive. Also, sometimes particular sectors face a slowdown due to natural calamities or any other reason, such as a significant player going bankrupt. Such an occurrence hurts the smaller players in the sector. Then there are those times at which only your business suffers due to some issue. Such a situation can occur when a competitor gains business from you, your equipment suffers a breakdown, or your office comes under the spate of a fire. Insurance is a good practice to protect your business during such an occurrence and can help your business stay afloat. So, you must buy insurance for your business and all its assets in the same way that you insure your life and your health.
In such a situation, it is highly probable that your business will suffer from losses, and would require credit so that the business can make payments to creditors and employees. At such a time, no bank will offer you credit, or might even close or reduce your existing credit limits. Creating a bunch of shelf corps with lines of credit can help you make it out of such a situation, as these credit lines will not be affected by a slowdown in your primary business.
Thus, we’ve had quite a good discussion on risk. In the next blog, we will talk about how you can maximize the value of your existing business through diversification.
Read more on Shelf corporation and their credit prospects: Shelf Corporations and Credit