Business Posts

Risk, Insurance, and Small Business

Owning a business presents opportunities for personal financial success and satisfaction in a particular occupation. However, it also comes with several different types of risk. These include economic, compliance, security and fraud, operational, reputational, financial, and competition risks. Risk managers are engaged in identifying risks and deploying proven techniques to treat each of these types of risks.

Today we will consider the operational risks of a business and the treatment technique of risk transfer. This post is for informational purposes only and nothing here should be taken as advice or direction. Any purchase of insurance should be discussed in detail with a qualified licensed insurance professional.

Operational risk can happen internally or externally or involve a combination of factors. Something could unexpectedly happen that causes a loss of business continuity. That unexpected event could be a natural disaster or fire that damages or destroys a physical business. It might involve a server outage caused by technical problems, people, or a power cut. Many operational risks are also people related. An owner or an employee might make mistakes that cause injury or damage that will, at a minimum, cost time and money. Whether the result of a people or process failure, operational risks can adversely impact a business in terms of money, time, and reputation.

Getting a third party to bear the costs of operational risk is called a risk transfer. To get a third party to accept the risk will require something in return. Insurance is a common example of a risk transfer. When individuals or businesses buy insurance policies, the risks of unknown severe financial losses are transferred to an insurer for a smaller and predictable expense: an insurance premium.

There are four fundamental insurance coverage contracts or policies that are applicable to most small businesses, depending on the nature of their specific operations. Here is a brief description of each with some suggestions on how to shop for coverage and what to ask an insurance professional when seeking an insurance risk transfer.

The Business Owner’s Policy (BOP)

A BOP combines business property and business liability insurance into one convenient policy. The property coverage part protects a business from losses resulting from fire, theft, or some other covered disaster causing damage to business owned property. The liability coverage part protects against claims involving bodily injury, property damage, or personal or advertising injury that could arise from regular business operations.

Businesses can tailor a BOP to help meet their unique needs by adding optional coverages like data breach, business income for off-premises utility services, and other specialized coverages.

Consider buying a business owner’s policy if:

  • Your business has a physical location, whether it is out of your home or in a rented or owned office, retail space, or similar workplace.
  • There is a possibility of being sued–for example, by a customer who was injured because of your negligent act.
  • You have assets that could be stolen or damaged–whether digital assets, customer data, equipment, furniture, cash, or inventory.
The Business Auto Policy (BAP)

Business auto insurance protects a business against financial costs resulting from an auto accident if you or an employee is found at fault. The BAP will pay for property damage and bodily injury resulting from use of the business’s vehicle. The BAP can also cover medical expenses for the people in the business’s vehicle and physical damage caused to an owned vehicle.

The BAP will pay for claims such as these:

  • An employee injures a pedestrian while driving a company vehicle and the injured pedestrian requires medical treatment.
  • An owned vehicle swerves off the road while being driven to work and causes property damage to structures or other vehicles.
  • An employee driving on a work-related errand accidentally hits another car, causing damage.
The Commercial Umbrella Policy

Commercial umbrella policies provide an extra level of liability protection over the policy limits of underlying coverage. Significant assets can be at risk when businesses are the target of lawsuits. If the cost of a claim exceeds the limits of a business’s underlying primary insurance in the BOP or BAP, for instance, then the umbrella policy will cover the amount of claim that exceeds those limits. Without commercial umbrella insurance, business owners could be obligated to pay out of pocket for legal fees, medical bills, and damage expenses that exceed the limits of their underlying primary business coverages.

Consider purchasing an umbrella policy if:

  • The work performed in your business has the potential of causing significant damage or injury.
  • The characteristics of your expected customers suggest potentially higher financial value of injuries or property damage you may cause (e.g., you perform work for celebrities or high-net worth clients).
The Workers’ Compensation Policy

Workers’ compensation insurance provides benefits to employees for work-related injuries or illnesses, including medical care, lost wages, and more. Workers’ compensation insurance also provides a deceased worker's family with a financial benefit. If a worker's family decides to sue the company, the employer’s liability coverage part found in all workers’ compensation policies can also help cover related legal fees incurred by the business.

Workers’ compensation insurance can help protect your business and employees in events such as these:

  • An employee slips on ice while walking up the stairs to the office, causing injury that requires an emergency room visit and weeks of recovery time.
  • An employee’s back is injured when lifting a box of printer paper and requires a doctor’s attention, medication, and physical therapy.
  • An employee returning to the office from visiting a client is injured in a car accident and requires hospitalization.

We have only discussed four basic policies here, but there are many different insurance policies for just about everything you might imagine. If other coverage is needed, an insurance professional can describe additional policies intended for situations involving employee theft, professional liability, and product liability, as well as fidelity and surety bonds.

Business librarians, NaperLaunch coaches, and SCORE mentors are available for one-to-one mentoring sessions on these and other topics. They are also discussed in the NaperLaunch Academy Workshop series.

Tuesday, March 9, 2021 - 08:45

5 Tips for Mapping Marketing Messages

In a previous post we described the process of creating a unique value proposition. Your UVP is a natural starting point for creating your marketing messages because it clearly identifies your target customer and explains the end benefit of using your product or service and what makes it unique and different from the competition.

With your UVP in hand, the next step is mapping your marketing messages. Developed by marketers George Stenitzer and Tripp Frohlichstein, message mapping is a framework used to create compelling, relevant messages for various audience segments. It enables you to hook people’s attention by quickly answering the question “What’s in it for me?”. It also serves as a tool to ensure the delivery of a consistent message that addresses all of your audiences, including customers, employees, investors, and influencers. The goal is to get others to talk about you using your language, thereby building your brand.

A message map consists of one main idea, supported by three reasons to believe it (called positive points). As your map develops, you find three proof points to support each positive point. These proof points may take the form of testimonials, reviews, statistics, or other evidence. A variety of message mapping templates can be found online; for an example of a basic message map, see Fig. 1.

Figure 1. Basic Message Map

Basic Message Map

Figure 2 shows an example of a completed message map using this format. In this example message map created for NaperLaunch, the main idea is supported by positive points and proof points related to the services, brand values, and differentiation from competitors.

Figure 2. Completed Message Map

Completed Message Map

As you map your marketing messages, keep these 5 tips in mind:

  • Think about the audience. Envision the ideal customer for your product or service. What are their characteristics? What are the problems that this customer faces? If you created a Lean Business Model Canvas for your business, this information will be in the Customer Segments box. If you’re feeling ambitious, you can create customer personas. The better you understand your audience, the easier it will be to create messages that speak directly to them and communicate the benefits your product or service can provide.
  • Choose your words carefully. Because a marketing message is brief, every word matters. Strive to use words that will resonate strongly with your target audience and that will need little explanation. Think about the emotions your words evoke and the various meanings the words may have for the audience.
  • Consider the tone. The tone of a message can be just as important as the words used to craft it. Think about how you want your audience to view your company. Do you want them to view you as an expert? A problem-solver? A gateway to fun and excitement? Depending on the message, the desired tone might be positive, authoritative, or empathetic.
  • Do your research. Look at successful brands and companies that target your audience. What words and tones do these companies use to convey their message? How does their audience respond? Visit their websites and social media profiles to see how they communicate and interact with this audience.
  • Give your audience a reason to believe. Consider the reasons why your target audience will choose to engage in the goals of your marketing campaign. Why should they buy from your company? Why is your service, product, or idea better than your competition’s? How are you able to best meet your audience’s needs? Just be sure you can deliver on these reasons to believe; audiences are savvy and will be able to see through any inflated promises.

For more in-depth discussion on this and related topics, consider registering for the NaperLaunch Academy workshops or contact a NaperLaunch coach or SCORE mentor to set up a one-on-one virtual appointment.

Monday, March 1, 2021 - 14:45

Taxes and Small Business

Taxes are important to consider when starting a business. Business owners must know the types of taxes that may apply to their business and understand the requirements and processes for paying them. It is also important that owners account for these taxes in their operational and financial plans. In this post we will discuss several types of taxes, how they are calculated, and how to pay them, as well as advance planning considerations. Please note that this information is not intended to be tax advice or guidance, nor is it a comprehensive coverage of tax issues. Business owners should consult qualified, knowledgeable professionals for tax advice.

Types of Business Taxes

Income tax is based on net profit from business operations. When customary and necessary expenses to operate a business are subtracted from the revenue generated in that business, the remainder is net profit.

Owners of sole proprietorships, partnerships, limited liability companies, and s-corporations report net profit on their personal income tax forms. The income tax obligations are said to be a “pass-through” from the business to the individual owner(s) and the business does not pay corporate income taxes. Regular corporations report corporate profits on separate tax return forms and must pay corporate income tax.

Besides federal tax obligations to the Internal Revenue Service, in most cases business owners will also be charged state income tax and possibly city and county taxes as well.

Self-employment tax will generally apply to an owner who is in business for him or herself. Basically, you're self-employed for this purpose if you're a sole proprietor (including an independent contractor), a partner in a partnership (including a member of a multi-member limited liability company (LLC) that is treated as a partnership for federal tax purposes), or are otherwise in business for yourself. The term sole proprietor also includes the member of a single member LLC that's disregarded for federal income tax purposes and a member of a qualified joint venture.

You usually must pay self-employment tax if you had net earnings from self-employment of $400 or more. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business.

You can be liable for paying self-employment tax even if you currently receive Social Security benefits. The law sets a maximum amount of net earnings subject to the Social Security tax. This amount changes annually. All of your net earnings are subject to the Medicare tax.

Owners become obligated to pay employment tax if they hire one or more employees. Employment taxes, including Social Security and Medicare taxes on wages, are paid by both the employer and the employee:

  • Employers are required to withhold and remit federal and state income tax from employees’ wages.
  • Employers withhold and remit part of Social Security and Medicare (FICA) taxes from employees’ wages and also remit a matching amount.
  • Employers generally pay state and federal unemployment insurance (FUTA) tax. This is paid separately from other taxes.
  • Employers also pay into state disability insurance programs.

Excise taxes are paid by manufacturers or sellers of certain products, owners of certain kinds of businesses, or users of certain types of equipment. For example, indoor tanning services and businesses that operate heavy vehicles (such as trucks) on highways pay excise taxes.

Most states require sales tax to be collected by retail sellers. Each state has its own process to follow for these taxes to be remitted to the state. See the section below on state and local taxes for more information regarding sales tax remittance. We will discuss sales tax in more detail in a future post.

Collection and remittance of local taxes may be required for real estate and personal property taxes, depending on individual circumstances and the location of a business. In addition, some jurisdictions charge taxes on end-of-year inventory. Owners should check with state, county, and city agencies to determine local requirements.

Federal Tax Forms

A taxpayer identification number (TIN) is required by the IRS to process tax returns. The two most common types are social security numbers (SSN) and the employer identification number (EIN). An EIN is issued by the IRS to sole proprietors, partnerships, limited liability companies, and corporations. An EIN is required if the business has employees, has a qualified retirement plan, is a corporation or partnership, or files returns for employment taxes.

The organizational structure of the business impacts which income tax return forms are used and how taxes are paid. A short list of federal income tax forms as used by each of the four major business types can be found in Table 1.

Table 1. Federal Tax Return Forms
Organizational Structure Income Tax Return Forms
Sole Proprietorship
  • 1040, U.S. Individual Income Tax Return
  • Schedule C, Profit or Loss from Business
  • 1065, U.S. Return of Partnership Income
  • Schedule K-1 (Form 1065), copies to each partner showing individual share of partnership income
  • Partners each file 1040, U.S. Individual Income Tax Return
Limited Liability Company
  • Structure not recognized by IRS. Owners may file a tax return as either sole proprietor, partnership, or corporation. Choose whichever tax return form option is most convenient or agreeable to you.
Corporation S-corporations:
  • 1120-S, U.S. Tax Return for an S-corporation
  • Schedule K-1, copies to each shareholder showing individual share of partnership income
  • Each shareholder files an individual tax return as a sole proprietor
  • 1120, U.S. Corporation Income Tax Return
  • After corporate income taxes are paid, any distributions of income to shareholders are taxed again as dividends on individual tax returns using form 1040

Employment and other tax forms are listed in Table 2. Employment taxes include taxes that employers are required to withhold from their employees’ wages and taxes the employer pays. They also include any self-employment taxes for self-employed business owners.

Table 2. Employment and Other Tax Forms
Form Title Number Purpose
Employers Annual Federal Unemployment (FUTA) Tax Return 940 Filed with the IRS annually to report the amount of FUTA for all employees
Employers Quarterly Federal Tax Return 941 Used by employers to report employment taxes, withholding amounts, deposit amounts, and amounts due the IRS.
Employee’s Withholding Allowance Certificate W-4 Completed by an employee to communicate exemption status to the employer so that the correct amount of tax can be withheld from paychecks.
Wage and Tax Statement W-2 Sent by employer to an employee and the IRS each year reporting the employee’s annual wages and the amount of taxes withheld from paychecks.
Nonemployee Compensation 1099-NEC Used by employers to report payments totaling more than $600 annually to an independent contractor, other than a corporation.
Miscellaneous Income 1099-MISC Used by employers to report payments to persons, other than corporations, that are not independent contractors (eg, royalties above $10, rent and other payments above $600, and direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment).

State and Local Income Tax

The Illinois Department of Revenue has established e-services to support and expedite the remittance of state income and sales tax and other taxes. More information can be obtained on the IDOR website.

Final Considerations

As mentioned at the start, owners should plan ahead and anticipate the taxes that will be due and how that obligation will impact business operations and cash flow. It is of the utmost importance to get qualified advice from tax professionals. The IRS has developed a course on managing taxes: Small Business Taxes: The Virtual Workshop.

Some business owners make the mistake of spending tax money on business operations. When taxes come due, these owners are short of funds. There are significant penalties when taxes are paid late. Business owners should maintain separate accounting of tax funds so that taxes can be paid when due.

Accounting employees or third-party accounting services can be hired to provide proper bookkeeping oversight and financial management to maintain adherence to proper accounting principles. Taking responsible action regarding the money and tax operations will go a long way in assuring a successful business.

More instruction on this and related topics can be obtained in the NaperLaunch Academy Workshop Series. Registration information is found on the NaperLaunch website. Mentoring or one-to-one appointments can also be arranged with a NaperLaunch Coach, SCORE Volunteer, or Business Librarian by visiting the mentoring page.

Friday, February 26, 2021 - 10:45