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Because learning changes everything.®
Chapter Sixteen
Small Business Protection:
Risk Management and Insurance
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
© McGraw-Hill Education 2
Risk in Small Business
For business owners, risk is the probability the future will not go as planned.
• You may be the target of a lawsuit.
• Regulatory changes and enforcement may cause great losses.
• All kinds of natural disasters can and do happen.
Though not everyday occurrences, they do occur and your firm may suffer.
People vary widely in their response to risk.
• Some business owners are risk seeking.
• Though most are risk-averse.
If you cannot reduce the risk to a comfortable
level, then either insure or spread the risk.
An owner
considers their
potential losses
with each business
decision.
© McGraw-Hill Education 3
Thinking about Risk
Common sources of risk.
• Financial risk when choosing
capital investments.
• Theft of business property.
• Nonpayment of debts.
• Cyber attacks.
• Changes in technology.
• Employee injuries and
illnesses.
• Customer/vendor/other’s
injuries from accidents.
• Loss or harm caused by the
product or service.
• Natural events, such as storm,
flood, fire, earthquake.
• Violation of laws and
regulations.
• Misbehavior by employees.
© McGraw-Hill Education 4
Risks Associated with Specific Business Operations
There are three
general types of events
that cause business
risk.
Events related to the
property of the
business.
Events related to
personnel.
Events related to
customers and others.
© McGraw-Hill Education 5
Risks Related to the Property of the Business
• Every business owns things of value – inventory, reputation, skill,
production machinery, and experience.
• Many own furniture, office equipment, vehicles, buildings, and land.
• Some own patents, copyrights, trademarks, or trade secrets.
Each type of property involves specific forms of risk.
• Inventory can be stolen, spoiled, or obsolete.
• Production machinery can break down.
• Skill and experience may be lost when key employees die, retire, quit.
• Furniture, equipment, vehicles, buildings may be damaged by
vandalism, accidents, fire, flood, or wind.
• Land may become contaminated.
• Patents may be infringed upon or trade secrets disclosed.
© McGraw-Hill Education 6
Events Related to Personnel
Employee theft is a fact of life for almost all businesses.
• Most theft is small but could be significant enough the business fails.
Regulation of the workplace has increased but
small firms heed the IRS, the EEOC, and OSHA.
• In 1964, the EEOC established five protected
classes.
Authority of the EEOC increased with passage of:
• The Age Discrimination in Employment Act
(ADEA) of 1967.
• The Rehabilitation Act of 1973.
• The Americans with Disabilities Act (ADA)
of 1990.
• The Civil Rights Act of 1991.
Loss of key
employees is a
risk and may lead
to bankruptcy.
Competition from
former employees
is an acute risk in
knowledge and
service businesses.
When key
employees leave,
others may follow.
© McGraw-Hill Education 7
Events Related to Customers and Others
Customers, vendors, and even trespassers pose a risk in the form of:
• Injuries suffered while on business property.
• Injury or damage caused during the use of the business’s products.
Injuries suffered while on business property may or may not be your fault.
• A customer climbs on a shelf, which breaks.
• A trespasser may be harmed or cause harm to employees, customers,
or vendors.
Payment for injury or damage occurring during use of the product is
referred to as product liability.
• Magnitude of losses has increased, as has class action suits.
• Small businesses are not as exposed to class action suits as they
have fewer customers who can claim harm, and they do not have
“deep pockets” of cash which attracts law firms.
© McGraw-Hill Education 8
Managing Risks
No risk can be completely avoided, so create an environment that
minimizes:
• The probability of the event occurring.
• The amount of loss experienced if the event does occur.
Do this by:
• Making specific plans and arrangements for foreseeable events.
• Create and enforce appropriate conduct for you and your employees.
• Ensure valuable assets are physically secure.
• Actively work to get rid of physical hazards in your workplace.
Working proactively ensures your business is free of hazards and secure
from injuries and violations of EEOC or OSHA rules.
© McGraw-Hill Education 9
Managing Risk to Tangible Property:
Protecting Your Business from Theft
Theft protection depends on the type of property held.
• Land may not be stolen but you can suffer from adverse possession.
• Most at risk is cash and small items of high value then easily sold.
Do two things to protect yourself from theft.
• Physically protect your property.
• Develop and enforce rules that prevent the employee responsible for
the asset from being able to account for the asset.
• This is called separation of duties, and is a core technique to
safeguard money and other valuable assets.
Though separation of duties deters a single person, nothing will keep two
or more cooperating employees from stealing company property.
• Such collusion is the source of the largest amount of employee theft.
© McGraw-Hill Education 10
Managing Risk to Tangible Property:
Managing Risk to Inventories
Inventory is subject to theft, it is often lost, damaged, or spoiled.
• Inventory may be stolen by employees, shoplifters, or burglars.
Reduce employee theft by first educating them.
• Watch who you hire, document policy, and
observe at shift changes or in break areas.
Reduce shoplifting by:
• Having uniformed security visible.
• Monitor customers in bulky clothing.
• Train checkout clerks to recognize inventory
items to detect label switching.
• Install and use video cameras.
Preventing burglary
is difficult.
Ensure police
drive-by frequently.
Consider hiring
private security.
Make sure all
possible entrances
have alarms.
© McGraw-Hill Education 11
Managing Risks to Tangible Property:
Risk to Buildings and Land
Protection from fire for buildings may be obtained by installing smoke
alarms and sprinkler systems and having a fire plug nearby.
• Remove flammable ground cover near buildings.
Protect from flood by not locating on a flood plain.
• Floods can also occur from streams and rivers overflowing their banks.
• Breaks in water pipes, accidental sprinkler activation, sewer
blockages, and runoff can flood a building.
Protection from storms comes from enforcing building standards.
• Storm proofing a building depends on geography – buildings built to
withstand tornados or snowfall are useless if there is a landslide.
© McGraw-Hill Education 12
Managing Risks to Tangible Property:
Tools, Equipment, Inventory, and Other Portable Items
This is largely a function of developing and enforcing appropriate
business policies and procedures.
• Maintain tools and equipment to prevent serious wear and damage.
• Frequent inspections allow repairs to be made systematically.
Keep easily stolen physical assets in locked storage when not in use.
• Have a rigidly enforced procedure requiring employees to sign for
removing an item from storage.
• A manager’s signature should be required to confirm the item has
been returned to the proper storage when no longer needed.
© McGraw-Hill Education 13
Managing Risks to Tangible Property:
Risk to Computers and Data
The best way to protect your computers are a firewall, an antivirus
program, and antispyware programs.
Your OS has security features, or buy an all-in-one security program.
• The least expensive system is a free stand-alone program but it can
be difficult to install and update correctly.
You can protect your data using encryption.
• Once encrypted, if you lose the password you lose the file.
• Most data theft comes from inside the building.
The cost is not just lost revenue but lost time.
• The solution is having multiple backups.
© McGraw-Hill Education 14
Managing Risk to Intangible Property
Intellectual property rights comprise the legal rights to use unique
features of products or services that provide competitive advantage.
• Legally protect those rights by keeping the process secret, filing for a
copyright or trademark, or obtaining a patent.
Copyrights, trademarks, and patents do not automatically protect you.
• Anyone may copy any of these items at any time.
• If, and only if, the holder of the intellectual property rights makes
written objections can the legal rights be maintained.
• Holding legal rights provides the owner with grounds to pursue
lawsuits against infringement.
• Guarding against infringement is best accomplished by maintaining a
diligent watch on business intelligence for your industry.
© McGraw-Hill Education 15
Managing Risk Resulting from Events Involving Personnel
This starts with the hiring process – identify people of high moral
character and ethical standards.
• Because all people are fallible, owners have an obligation to make
theft difficult and honesty easy and rewarding.
Internal control is the primary method of
ensuring honesty in employees.
• The most basic method is separation of duties
and is most important for intangible assets.
• Cash is stolen using false disbursements.
• Secure valuable property, lock it up.
• Contract with key employees to avoid them
competing against you.
Include provisions to:
Limit their ability to go
into competition.
Contain their promise
not to disclose
sensitive or secret
information.
Offer rewards for
adequate termination
notice and a smooth
transition.
© McGraw-Hill Education 16
Managing Risk from Violations of Tax Regulations
The tax codes of all levels of government have grown more complex.
• Franchise or corporation taxes, income taxes, employee taxes, sales
and use taxes, and property taxes.
There are simple techniques that limit your exposure to tax violations.
• First, keep complete, accurate accounting records.
• Second, hire an accountant and lawyer who are experts in tax issues.
• Third, make paying your taxes your first financial priority.
© McGraw-Hill Education 17
Managing Risk from Employee Violation of Government
Regulations
Reducing risk involves providing a written policy to each employee, train
employees on the policies, and consistently act on any complaints.
• Along with policy, training, and enforcement, know the EEOC rules,
and have the EEOC assess your compliance.
To avoid ADA violations:
• Determine if you are subject to
the provisions.
• Have ADA experts asses your
compliance.
• Work diligently to meet the
requirements.
The best way to meet basic
OSHA requirements:
• Maintain tools and equipment
in good condition.
• Provide appropriate safety
equipment and training.
• Provide medical examinations.
© McGraw-Hill Education 18
Using an Internal Audit as a Tool to Manage Risk
An internal audit is a management tool and not provided to outsiders.
• Provides an evaluation of your business risk and risk control structure.
• Analyzes your processes and controls and roots out irregularities.
• Reviews compliance, the existence/value of assets, and your
operational and financial performance.
• Provides recommendations for efficient use of resources.
• Assesses your goals/objectives achievement and provides information
on employees’ adherence to the firm’s values and ethics.
To be sure the audit meets your goals:
• Meet with the auditor and establish that you have final authority to
review and approve the plan.
• Write an agreement establishing the scope of work and then provide
them sufficient authority to conduct the audit.
© McGraw-Hill Education 19
Insuring against Risks
Though impossible to avoid all business risks, insurance can minimize
damages such risks can cause.
The key to using insurance is to obtain the “right” amount at an affordable
rate.
Having too little insurance leaves the business open to unsupportable
losses.
Carrying too much insurance wastes money.
© McGraw-Hill Education 20
Using Insurance to Manage Risks
Insurance is a contract between two businesses.
• The insurance company agrees to pay for specific “covered” events
that cause your business to suffer financial loss.
Not all risks are insurable.
• You are betting your business will be damaged or destroyed and the
insurance company is betting it won’t.
• The insurance company collects more in premiums than it pays out.
• You “win” by having the insurance company pay when your business
suffers a covered loss.
• The more likely an event is to occur, the higher the price for coverage.
• Coverage is either not available or very expensive for common events.
© McGraw-Hill Education 21
Developing a Comprehensive Insurance Program
This requires that you understand the risks to your business, know the
amount of loss you could suffer, and then obtain appropriate rates from
reliable insurers.
• There are common risks and business-specific risks.
• Coverages required by law provide social protection from harm, such
as auto liability, worker’s compensation, and unemployment insurance.
• Desired coverages beyond mandatory insurance include general
liability, product liability, catastrophe, and various malpractice insurance.
• You, as an individual owner, can obtain a general liability insurance,
called an umbrella policy, or a success protector policy.
© McGraw-Hill Education 22
Insuring the Property of the Business
Property insurance determined by:
• Insurable value.
• Amount of deductible loss.
• Amount of co-insurance
required.
• Loss limits of the policy.
There are other types of insurance.
• Business interruption insurance.
• Crime insurance.
• Theft insurance may require
employees be bonded with
fidelity bonds or surety bonds.
• Credit insurance requires co-
insurance.
• Personnel insurance.
• Key person insurance.
• Life insurance.
• Disability insurance – buyout
insurance is common.
• Medical coverage.
© McGraw-Hill Education 23
Sharing Risk
One way to share
risk is through
insurance that
diversifies risk.
Risk can be directly
shared without an
insurance
company.
By forming joint
ventures.
By joining industry
groups.
By obtaining
government grants
and guarantees.
© McGraw-Hill Education 24
Sharing Risk: Joint Ventures
Joint ventures are partnerships in which two or more businesses
combine to undertake a specific economic activity.
• Usually formed and taxed as partnerships.
• The ability to assign tax items to the partner for which they are most
advantageous eases forming of the partnerships.
• Another advantage is that each partner can lose no more than its
investment in the venture.
• The joint venture is a separate entity from any of the partners.
© McGraw-Hill Education 25
Sharing Risk: Industry Groups for Insurance Coverage
Joining in groups provides benefits of scale to members.
• The most common benefit is low-cost group insurance.
• Insurance cost is partly a function of the risk the provider assumes.
• They diversify risk by insuring large numbers of similar businesses.
• A large group is able to obtain much lower insurance rates for its
members than the members can obtain individually.
© McGraw-Hill Education 26
Sharing Risk: Government Funding of Risky Ventures
Townships up to the federal government have programs to encourage
economic activity.
• Governments do not make profits, but they can tax.
• As a result, risk for a government is very different than risk for private
business.
• Governments often subsidize very risky ventures that private
companies would otherwise never attempt.
• As in the subsidizing of sports arenas, convention centers, and
convention hotels.
• Small businesses can obtain government subsidies through direct
contracting and grants.
Because learning changes everything.®
www.mheducation.com
End of main content.
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.

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  • 1. Because learning changes everything.® Chapter Sixteen Small Business Protection: Risk Management and Insurance Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
  • 2. © McGraw-Hill Education 2 Risk in Small Business For business owners, risk is the probability the future will not go as planned. • You may be the target of a lawsuit. • Regulatory changes and enforcement may cause great losses. • All kinds of natural disasters can and do happen. Though not everyday occurrences, they do occur and your firm may suffer. People vary widely in their response to risk. • Some business owners are risk seeking. • Though most are risk-averse. If you cannot reduce the risk to a comfortable level, then either insure or spread the risk. An owner considers their potential losses with each business decision.
  • 3. © McGraw-Hill Education 3 Thinking about Risk Common sources of risk. • Financial risk when choosing capital investments. • Theft of business property. • Nonpayment of debts. • Cyber attacks. • Changes in technology. • Employee injuries and illnesses. • Customer/vendor/other’s injuries from accidents. • Loss or harm caused by the product or service. • Natural events, such as storm, flood, fire, earthquake. • Violation of laws and regulations. • Misbehavior by employees.
  • 4. © McGraw-Hill Education 4 Risks Associated with Specific Business Operations There are three general types of events that cause business risk. Events related to the property of the business. Events related to personnel. Events related to customers and others.
  • 5. © McGraw-Hill Education 5 Risks Related to the Property of the Business • Every business owns things of value – inventory, reputation, skill, production machinery, and experience. • Many own furniture, office equipment, vehicles, buildings, and land. • Some own patents, copyrights, trademarks, or trade secrets. Each type of property involves specific forms of risk. • Inventory can be stolen, spoiled, or obsolete. • Production machinery can break down. • Skill and experience may be lost when key employees die, retire, quit. • Furniture, equipment, vehicles, buildings may be damaged by vandalism, accidents, fire, flood, or wind. • Land may become contaminated. • Patents may be infringed upon or trade secrets disclosed.
  • 6. © McGraw-Hill Education 6 Events Related to Personnel Employee theft is a fact of life for almost all businesses. • Most theft is small but could be significant enough the business fails. Regulation of the workplace has increased but small firms heed the IRS, the EEOC, and OSHA. • In 1964, the EEOC established five protected classes. Authority of the EEOC increased with passage of: • The Age Discrimination in Employment Act (ADEA) of 1967. • The Rehabilitation Act of 1973. • The Americans with Disabilities Act (ADA) of 1990. • The Civil Rights Act of 1991. Loss of key employees is a risk and may lead to bankruptcy. Competition from former employees is an acute risk in knowledge and service businesses. When key employees leave, others may follow.
  • 7. © McGraw-Hill Education 7 Events Related to Customers and Others Customers, vendors, and even trespassers pose a risk in the form of: • Injuries suffered while on business property. • Injury or damage caused during the use of the business’s products. Injuries suffered while on business property may or may not be your fault. • A customer climbs on a shelf, which breaks. • A trespasser may be harmed or cause harm to employees, customers, or vendors. Payment for injury or damage occurring during use of the product is referred to as product liability. • Magnitude of losses has increased, as has class action suits. • Small businesses are not as exposed to class action suits as they have fewer customers who can claim harm, and they do not have “deep pockets” of cash which attracts law firms.
  • 8. © McGraw-Hill Education 8 Managing Risks No risk can be completely avoided, so create an environment that minimizes: • The probability of the event occurring. • The amount of loss experienced if the event does occur. Do this by: • Making specific plans and arrangements for foreseeable events. • Create and enforce appropriate conduct for you and your employees. • Ensure valuable assets are physically secure. • Actively work to get rid of physical hazards in your workplace. Working proactively ensures your business is free of hazards and secure from injuries and violations of EEOC or OSHA rules.
  • 9. © McGraw-Hill Education 9 Managing Risk to Tangible Property: Protecting Your Business from Theft Theft protection depends on the type of property held. • Land may not be stolen but you can suffer from adverse possession. • Most at risk is cash and small items of high value then easily sold. Do two things to protect yourself from theft. • Physically protect your property. • Develop and enforce rules that prevent the employee responsible for the asset from being able to account for the asset. • This is called separation of duties, and is a core technique to safeguard money and other valuable assets. Though separation of duties deters a single person, nothing will keep two or more cooperating employees from stealing company property. • Such collusion is the source of the largest amount of employee theft.
  • 10. © McGraw-Hill Education 10 Managing Risk to Tangible Property: Managing Risk to Inventories Inventory is subject to theft, it is often lost, damaged, or spoiled. • Inventory may be stolen by employees, shoplifters, or burglars. Reduce employee theft by first educating them. • Watch who you hire, document policy, and observe at shift changes or in break areas. Reduce shoplifting by: • Having uniformed security visible. • Monitor customers in bulky clothing. • Train checkout clerks to recognize inventory items to detect label switching. • Install and use video cameras. Preventing burglary is difficult. Ensure police drive-by frequently. Consider hiring private security. Make sure all possible entrances have alarms.
  • 11. © McGraw-Hill Education 11 Managing Risks to Tangible Property: Risk to Buildings and Land Protection from fire for buildings may be obtained by installing smoke alarms and sprinkler systems and having a fire plug nearby. • Remove flammable ground cover near buildings. Protect from flood by not locating on a flood plain. • Floods can also occur from streams and rivers overflowing their banks. • Breaks in water pipes, accidental sprinkler activation, sewer blockages, and runoff can flood a building. Protection from storms comes from enforcing building standards. • Storm proofing a building depends on geography – buildings built to withstand tornados or snowfall are useless if there is a landslide.
  • 12. © McGraw-Hill Education 12 Managing Risks to Tangible Property: Tools, Equipment, Inventory, and Other Portable Items This is largely a function of developing and enforcing appropriate business policies and procedures. • Maintain tools and equipment to prevent serious wear and damage. • Frequent inspections allow repairs to be made systematically. Keep easily stolen physical assets in locked storage when not in use. • Have a rigidly enforced procedure requiring employees to sign for removing an item from storage. • A manager’s signature should be required to confirm the item has been returned to the proper storage when no longer needed.
  • 13. © McGraw-Hill Education 13 Managing Risks to Tangible Property: Risk to Computers and Data The best way to protect your computers are a firewall, an antivirus program, and antispyware programs. Your OS has security features, or buy an all-in-one security program. • The least expensive system is a free stand-alone program but it can be difficult to install and update correctly. You can protect your data using encryption. • Once encrypted, if you lose the password you lose the file. • Most data theft comes from inside the building. The cost is not just lost revenue but lost time. • The solution is having multiple backups.
  • 14. © McGraw-Hill Education 14 Managing Risk to Intangible Property Intellectual property rights comprise the legal rights to use unique features of products or services that provide competitive advantage. • Legally protect those rights by keeping the process secret, filing for a copyright or trademark, or obtaining a patent. Copyrights, trademarks, and patents do not automatically protect you. • Anyone may copy any of these items at any time. • If, and only if, the holder of the intellectual property rights makes written objections can the legal rights be maintained. • Holding legal rights provides the owner with grounds to pursue lawsuits against infringement. • Guarding against infringement is best accomplished by maintaining a diligent watch on business intelligence for your industry.
  • 15. © McGraw-Hill Education 15 Managing Risk Resulting from Events Involving Personnel This starts with the hiring process – identify people of high moral character and ethical standards. • Because all people are fallible, owners have an obligation to make theft difficult and honesty easy and rewarding. Internal control is the primary method of ensuring honesty in employees. • The most basic method is separation of duties and is most important for intangible assets. • Cash is stolen using false disbursements. • Secure valuable property, lock it up. • Contract with key employees to avoid them competing against you. Include provisions to: Limit their ability to go into competition. Contain their promise not to disclose sensitive or secret information. Offer rewards for adequate termination notice and a smooth transition.
  • 16. © McGraw-Hill Education 16 Managing Risk from Violations of Tax Regulations The tax codes of all levels of government have grown more complex. • Franchise or corporation taxes, income taxes, employee taxes, sales and use taxes, and property taxes. There are simple techniques that limit your exposure to tax violations. • First, keep complete, accurate accounting records. • Second, hire an accountant and lawyer who are experts in tax issues. • Third, make paying your taxes your first financial priority.
  • 17. © McGraw-Hill Education 17 Managing Risk from Employee Violation of Government Regulations Reducing risk involves providing a written policy to each employee, train employees on the policies, and consistently act on any complaints. • Along with policy, training, and enforcement, know the EEOC rules, and have the EEOC assess your compliance. To avoid ADA violations: • Determine if you are subject to the provisions. • Have ADA experts asses your compliance. • Work diligently to meet the requirements. The best way to meet basic OSHA requirements: • Maintain tools and equipment in good condition. • Provide appropriate safety equipment and training. • Provide medical examinations.
  • 18. © McGraw-Hill Education 18 Using an Internal Audit as a Tool to Manage Risk An internal audit is a management tool and not provided to outsiders. • Provides an evaluation of your business risk and risk control structure. • Analyzes your processes and controls and roots out irregularities. • Reviews compliance, the existence/value of assets, and your operational and financial performance. • Provides recommendations for efficient use of resources. • Assesses your goals/objectives achievement and provides information on employees’ adherence to the firm’s values and ethics. To be sure the audit meets your goals: • Meet with the auditor and establish that you have final authority to review and approve the plan. • Write an agreement establishing the scope of work and then provide them sufficient authority to conduct the audit.
  • 19. © McGraw-Hill Education 19 Insuring against Risks Though impossible to avoid all business risks, insurance can minimize damages such risks can cause. The key to using insurance is to obtain the “right” amount at an affordable rate. Having too little insurance leaves the business open to unsupportable losses. Carrying too much insurance wastes money.
  • 20. © McGraw-Hill Education 20 Using Insurance to Manage Risks Insurance is a contract between two businesses. • The insurance company agrees to pay for specific “covered” events that cause your business to suffer financial loss. Not all risks are insurable. • You are betting your business will be damaged or destroyed and the insurance company is betting it won’t. • The insurance company collects more in premiums than it pays out. • You “win” by having the insurance company pay when your business suffers a covered loss. • The more likely an event is to occur, the higher the price for coverage. • Coverage is either not available or very expensive for common events.
  • 21. © McGraw-Hill Education 21 Developing a Comprehensive Insurance Program This requires that you understand the risks to your business, know the amount of loss you could suffer, and then obtain appropriate rates from reliable insurers. • There are common risks and business-specific risks. • Coverages required by law provide social protection from harm, such as auto liability, worker’s compensation, and unemployment insurance. • Desired coverages beyond mandatory insurance include general liability, product liability, catastrophe, and various malpractice insurance. • You, as an individual owner, can obtain a general liability insurance, called an umbrella policy, or a success protector policy.
  • 22. © McGraw-Hill Education 22 Insuring the Property of the Business Property insurance determined by: • Insurable value. • Amount of deductible loss. • Amount of co-insurance required. • Loss limits of the policy. There are other types of insurance. • Business interruption insurance. • Crime insurance. • Theft insurance may require employees be bonded with fidelity bonds or surety bonds. • Credit insurance requires co- insurance. • Personnel insurance. • Key person insurance. • Life insurance. • Disability insurance – buyout insurance is common. • Medical coverage.
  • 23. © McGraw-Hill Education 23 Sharing Risk One way to share risk is through insurance that diversifies risk. Risk can be directly shared without an insurance company. By forming joint ventures. By joining industry groups. By obtaining government grants and guarantees.
  • 24. © McGraw-Hill Education 24 Sharing Risk: Joint Ventures Joint ventures are partnerships in which two or more businesses combine to undertake a specific economic activity. • Usually formed and taxed as partnerships. • The ability to assign tax items to the partner for which they are most advantageous eases forming of the partnerships. • Another advantage is that each partner can lose no more than its investment in the venture. • The joint venture is a separate entity from any of the partners.
  • 25. © McGraw-Hill Education 25 Sharing Risk: Industry Groups for Insurance Coverage Joining in groups provides benefits of scale to members. • The most common benefit is low-cost group insurance. • Insurance cost is partly a function of the risk the provider assumes. • They diversify risk by insuring large numbers of similar businesses. • A large group is able to obtain much lower insurance rates for its members than the members can obtain individually.
  • 26. © McGraw-Hill Education 26 Sharing Risk: Government Funding of Risky Ventures Townships up to the federal government have programs to encourage economic activity. • Governments do not make profits, but they can tax. • As a result, risk for a government is very different than risk for private business. • Governments often subsidize very risky ventures that private companies would otherwise never attempt. • As in the subsidizing of sports arenas, convention centers, and convention hotels. • Small businesses can obtain government subsidies through direct contracting and grants.
  • 27. Because learning changes everything.® www.mheducation.com End of main content. Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.