What Every Business Owner Needs to Know About Personal Liability

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As a business owner, you know how challenging it can be to plan for the long term while also putting out daily fires. From managing inventory to employees, you have a lot of your plate. And with great responsibility comes potential liability. 

For example, a customer could slip and fall while browsing the aisles of your store. Or, an employee could accidentally infringe a copyright while creating marketing materials. Should an error such as these lead to a lawsuit, who would pay the legal fees and bare the consequences? To protect your company—and yourself—you need to understand the risks and liabilities associated with running a business.

As a Business Owner, What am I Liable For?

Your personal liability ultimately depends on the structure of your business. According to The Balance Small Business, “A sole proprietorship doesn’t separate the owner from the business, so the business’ liability is the owner’s, with no limits. That’s why most businesses prefer to limit their liability by forming a corporation, LLC, or partnership.” However, even if you own an LLC, you can lose protection (often called “piercing the corporate veil”) under certain circumstances, such as:

  • If you chose to override your limited liability by signing a personal guarantee 
  • Fraudulent activity 
  • Committing a crime
  • Corporate misconduct 
  • Not maintaining the separation of the business entity

How to Reduce Your Own Liability

Having your own business also means protecting yourself. Besides knowing and adhering to the law, here are a few tips to minimize your liabilities as a business owner:

  • Choose the Right Business Structure– When you first form your company, you get to create an entity for it. If you don’t have a legal structure for your company, this means you’re running a sole proprietorship or a general partnership. It means that you will face the risk when your business incurs a lawsuit, and you may lose all of your property and assets. To avoid this, structure your business as an LLC so that your business is a separate entity, and you won’t face personal risks. An LLC can protect a business owner and managers from specific liabilities so that they don’t have to assume automatic personal liabilities if any legal issues arise.
  • Avoid Signing a Personal Guarantee– Be careful of documents that require your signature. As a business owner, you may need to opt for loans, and if you unknowingly sign a personal guarantee, it means that if your business is unable to pay back the debt, you agree to also reach into your funds to do so. Even if you change your business structure to an LLC, the signed document proves that you’re legally responsible for incurring the expenses, and a lender can take your assets instead.
  • Establish Separate Financial Accounts– Keep two separate accounts even though you may find it easier to pay for things you require for your business and personal life from one account. You may face personal liabilities if your business faces financial lawsuits. Use a business credit card for business transactions and a personal one for personal use.
  • Document All Business Transactions– Whenever business agreements or contracts are signed, they should be documented and stored safely and not with your personal records. Doing so ensures that you have proof of business operations and separated your personal and business documents to prevent facing personal liabilities.

Covering Your Business With Liability Insurance

Fortunately, business owners can also protect their companies with proper liability coverage. What is the definition of liability insurance? It’s any form of insurance that protects you from paying out of pocket for claims and lawsuits filed against your business. For business owners, there are a few essential forms of liability insurance: 

  • General Liability– This form of insurance covers medical costs and legal expenses regarding bodily injury, property damage, or advertising injury that your business causes to a third party. 
  • Property Liability– It protects your buildings, property, equipment, or inventory losses that result from natural or human-made calamities.
  • Professional Liability– Also called errors and omissions insurance, PLI protects your business and employees from claims made for negligent work, malpractice, and misrepresentation. It covers all legal expenses related to these claims (but not related to criminal activity) filed by clients or other businesses.
  • Employer Liability– This insurance provides coverage for legal expenses if an employee sues their employer for discrimination or wrongful termination.

Limiting Your Liabilities 

If you follow the law, understand your business’s unique risks, and have proper liability insurance coverage, you can sleep sound knowing you’ve done everything you can to protect your business, and yourself, from the unexpected. While you’ll never be able to eliminate the risks and resulting anxiety entirely, it’s well within your power to limit your liabilities as a business owner.