As a business owner, it’s your responsibility to do everything within your means to limit risk and to keep the business running smoothly. But a lot of small business owners don’t realize how liable they are while running their companies. Doctors, sky diving companies, and daycare centers are just a few professions generally associated with risk or liability. But even in an industry where lawsuits are not as prevalent, such as social media consulting or food and beverage, you still have a lot of risk. And therefore it is important to understand those risks.
While some jobs are obviously less risky than others, things can, and often do happen. A blogger may unintentionally plagiarize someone else’s work or a patron may slip and fall on a freshly mopped floor. As a small business owner it’s smart to anticipate problems and protect yourself from these dangers. In order to limit the risk of liability choose a business structure that separates you, as an individual, from your business. There are a couple of options here.
Separating Yourself From Your Business
Don’t make the mistake of operating your business as a sole proprietorship. In this case, if the company is sued the owner’s individual assets, such as retirement savings, cars, and homes are fair game in a court of law. Minimize your personal liability by incorporating your business either by forming an LLC or a corporation. This makes your business a separate entity and means that the corporation, not the business owner, is responsible for all of its debts and liabilities. While this step can minimize personal liability it doesn’t unconditionally protect you from it. You can still be held personally liable if you personally guarantee a loan for your business or intermingle your personal and business finances. So know the laws that govern LLCs and corporations and plan accordingly.
Another option for protecting the owner’s personal assets is to have a trust own the business. A trust is a legal entity that, in most cases, files its own tax return and can own property, cash, and businesses, among other assets. When a business is owned by a properly established trust, the only assets that can be attacked in a court of law are those that are in the trust itself.
Lastly is the option of incorporation through an S corporation. This is a popular option for small businesses seeking reduced liability because it has some other great benefits, including pass-through taxation. But an S corporation can be a bit more complex because it requires a board of directors and annual board meetings, as well as the on-going need to file paperwork to remain compliant.
While all of these business structures can reduce personal liability the most important thing you can do to protect yourself and your business is to insure yourself. There are three key types of business liability insurance – general liability, professional liability, and product liability. Research which option is best for the type of business you operate and keep in mind that you may need a combination of 2 or more for maximum protection. No matter what industry you’re in or how small your business is, it’s vital to think about liability concerns and to plan accordingly. Take the appropriate measures to protect yourself by choosing the best business structure, the right insurance plan, and remaining compliant to both.