Protecting Your Business from the "What Ifs"
Liability Insurance and Incorporation for Small Business
News from 05/11/2012 –
Autor: Andrew Hyatt
Businesses face liabilities every day. Some professions, i.e. doctor, sky-diving instructor, or daycare owner, are typically associated with risk, whereas others, especially those in the virtual world, are not, leading many to believe that nothing could happen to them. No way! However, you never know when a unintentional mistake or a disgruntled client could send a professional liability lawsuit your way. As a small business owner, you should protect yourself from these dangers.
If your business is set up as a sole proprietorship and are sued, you will be sued personally. This means all of your personal assets (retirement, house, etc.) will be put at risk. However, incorporating your business, meaning changing the legal form of your business and structuring your company to a limited liability corporation (LLC) or as an S corporation (S corp). The main advantage of forming an LLC or an S corp is that your personal assets can be protected from your business's creditors. Meaning if your business incurs debt, you are not personally liable for more than your financial investment in the company. The bank will not come after your house to get its lost money back.
Generally, for new business owners, forming an LLC may be a better choice, as less red tape is involved and it is typically cheaper to administer. However, for fast-growing small businesses planing to bring on investors or shareholders, making the switch to an S corp may be needed. If you are uncertain what would best fit your small business, be sure to speak with an accountant and/or attorney.
Forming your business as an LLC or corporation won't, however, unconditionally protect you from personal liability. If you, for example, personally guarantee a loan for your business, operate your business illegally, or don't operate your business as a separate entity (i.e. keeping your personal and business finances separate), you can be help personally liable.
In the event that you are confronted with a lawsuit, business liability insurance can protect your small business. Liability insurance covers legal difficulties due to accidents, injuries, or negligence of the company. It is designed to protect against third-party claims as a result of bodily injury, property damage, medical expenses, libel, slander, cost of defending lawsuits and costs required during an appeal procedure. When a claim is made, the insurance carrier has the duty to defend the insured. Policies for liability insurance generally fall into three classes:
- public liability, which covers liability exposures of individuals and businesses for damage to property and injury to individuals;
- product liability, which protects companies that manufacture, wholesale, distribute and retail a products from financial loss as a result of a defect product that causes injury or bodily harm;
- employers liability, which covers employees in case of bodily injury or illness arising out of (and in the course of) employment.
Conclusion: If you really want to protect yourself and your business, the first step would be to incorporate your startup, followed by liability insurance, if appropriate for your type of business. Being initially proactive and securing your assets will save you from much grief and financial hardship in the future.