FAQ how do I limit my entrepreneurial risk?
If you operate as a self employed, the profit you make is yours as well as losses and some risks. What are your risks and how can you reduce them?
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The biggest risks
As an entrepreneur, you face risks; consider the loss of income if you do not have enough assignments, become ill, or if your client fails to pay. A client may be dissatisfied or seek conflict. What happens to the payment or the assignment then? Is it withdrawn, or is the invoice left unpaid? What if there is a delay in payment?
Also consider how important your instruments, tools or materials can be. Suppose they get damaged or stolen. Does this mean you can no longer perform your work and thereby (temporarily) lose your income?
It is important to realise that these entrepreneurial risks also cause the Tax Authorities to classify you as an 'entrepreneur'. If you do not face these risks, you will not be classified as an entrepreneur for tax purposes. The good news is that you can largely mitigate these risks.
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Reducing risks
As an entrepreneur, you cannot fully protect yourself against all uncertainties; that is, in fact, the whole idea of being an entrepreneur. As an employee, for example, you are better protected, as the employer bears the risks, not you. However, you can significantly limit entrepreneurial risks in various ways;
Take extra good care of yourself
Good health is essential to function well. If you like participating in ‘dangerous’ sports, consider the consequences injuries will have on your career or business.
Keep in touch with your contacts
What do you know about the client. Are they financially sound; can they pay the bill? Are they trustworthy; is the client going to pay? Does the client communicate clearly, also when they deliver criticism; will they still pay? You can never really tell beforehand. You can consult your network; find out more about their reputation. Check if they are genuine.
Drawing up contracts and determining conditions
You should record a number of things on paper; including payment deadlines, extra interest with late payment, down payments. You can reduce liability in general terms, for example to the amount which your public liability insurance covers you or to the amount for which you have agreed on the contract. If the nature of the projects requires it, you can agree in the contract to discuss the continuation of the project in interims.
Choosing the right type of enterprise
If you start a legal form with legal entitity, business debt claims can only touch the assets of the corporation, not your private property. If you have assigned expensive assets to your corporation, like a house or musical instruments, debt collectors are able to claim them. Another option is forming a general partnership. A general partnership is not a legal personality with a legal entity but you can make agreements where it supports you in case of prolonged sickness and holidays. If you have a sole proprietorship as your business form, business debts can be recovered from your own private assets.
Business insurances
Private insurances will not cover your enterprising activities or goods. There are separate business insurances for that: think of a business liability insurance (maybe with an on approval coverage (opzichtdekking) and/or a professional liability insurance (beroepsaansprakelijkheidsverzekering)) , a disability insurance (arbeidsongeschiktheidsverzeking, AOV) and legal aid insurance or business content insurance (bedrijfsinboedelverzekering). Some professional associations offer interesting insurances or advice about insurances.