If you are sued as a sole proprietor, you will be sued personally. Your retirement savings, your house, and other assets could be at risk. Once your business is incorporated, it exists as a separate business entity. This means that the corporation is now responsible for all of its liabilities and debts. This is called the corporate shield in the industry. It separates your personal assets from your business assets.
For instance, if you are just starting out and get sued, your personal assets may be vulnerable for up to 22 years. This could be long after you are a huge success. It is very important to think about protecting the assets you have to today as well as whatever you may have tomorrow. It is easy to form an LLC. This is great for smaller businesses who want to protect their personal assets with minimal administrative requirements and red tape.
Personal Liability
The first crucial step to minimizing personal liability is forming or incorporating an LLC. This measure does not unconditionally protect you from personal liability. Here are several circumstances where you can still be held personally reliable:
* You mix your business and personal finances and do not operate your business as a separate entity.
* You operate your business illegally or commit a crime
* Your actions result in an injury.
* You personally guarantee a loan for your business.
Business Liability Insurance
Your small business can be protected from personal injury or pretty damages in case there is a lawsuit by having business liability insurance. Liability insurance comes in different forms. It depends on your business needs. You should discuss your specific business risks with a broker or an insurance agent who is familiar with your industry. Here are three main types of business liability insurance:
* General liability insurance – This protects your business from claims of negligence, property damages, injury claims, and advertising claims. General liability insurance may be the only type of insurance you may need depending on your business.
* Product liability insurance – This insurance protects you against financial loss as of a defective product that could cause harm. Companies that wholesale, manufacture, distribute, and retail a products may need this kind of insurance.
* Professional liability insurance – This kind of insurance protects business owners who supply services against negligence, errors, malpractice, and omissions. You may be legally required to have coverage in some professions. This includes a practicing doctor in specific states. Independent consultants are required to have their own coverage in some businesses.
Business Classification Can Affect Your Premium
Insurers have classifications for each kind of business. The classification in part determines how much your insurance coverage will cost. Each business will incur its own degree of risk. Insurance companies factor in these risks when the premium is calculated. Make sure your company is accurately classified to stop unnecessary expense. The amount of sales you make and the size of your payroll can affect your premiums as well.
The first essential step is incorporating or forming an LLC. This liability coverage if it is necessary. It is important to take your business and liability concerns seriously no matter how small your business or what industry you are in. You can save yourself from financial hardship and headaches down the line if you take a few steps and stay ahead.