If you're new to the world of entrepreneurship or you're starting a business of your own for the first time, you might get the advice to protect yourself from liability. Liability comes in a few different forms, referring to both financial liabilities and other legal responsibilities, and all of them have influential power over your business.
There are many ways to safeguard against business liability, including creating a limited liability company (LLC) or corporation and getting specific types of insurance, but what exactly is "liability," anyway, and just how important is it to protect yourself from it?
Understanding Business Liability
Liability simply refers to the state of being responsible for something. In the business world, this usually refers to two separate but somewhat related concepts:
Financial liability. In your accounting department, your liabilities will refer to debts payable. For example, if your business takes out a loan, the outstanding balance will be considered a liability, since the business is responsible for paying it back. Outstanding charges from vendors are also considered liabilities in the same way.
Other legal liability. Your business can also be responsible for adhering to laws, rules, regulations, and generally agreed-upon standards of care. If you're found violating these laws and norms, you could be held liable for whatever damages result from that failure; for example, in winter, most businesses are responsible for clearing their sidewalks of snow and ice. If you fail to do this and someone slips and falls, you could end up paying for the damages.
There are ways to protect yourself from both of these types of liabilities.
Shielding Yourself From Financial Liabilities
The only real way to protect yourself from the financial liabilities of your business is to establish your business as a separate legal entity. You can do this by creating a limited liability company (LLC) or corporation. These business entities can then take on debts of their own, separating them from you, personally, in most cases. If the business goes under, you will likely not be responsible for repaying the business's debts.
Other Forms of Liability Protection
You'll also need to think about legal liabilities. Here, your LLC or corporation will be able to shield you in most cases; because your company is treated as a distinct legal entity, that entity can often be held responsible for negligence. This won't protect you in 100 percent of cases, but it will provide a strong enough barrier to protect you from most instances.
On top of that, you'll probably want to have some kind of liability insurance. General liability insurance is designed to protect you from most of the common types of company-focused claims, like bodily injury, medical payments, and damage to property that arose from your business's operations. You can also purchase product liability insurance, which focuses on specific products you manufacture, and an umbrella policy to provide you with additional coverage.
How Important Is Liability Protection?
Now we know what liabilities are, and how to protect yourself from liability on both major fronts. But how important is that protection?
That depends on the nature of your business, but for the most part, liability protection is nearly always worth what you pay for it. In large-scale cases, companies have been found responsible for tens of billions of dollars of damages; and if you don't have any financial liability protection, you could be held personally responsible for whatever debts your business takes on. For example, if you fail to pay back a business loan, the issuing lender could seize your house.
You'll need to consider the following variables:
Your business's size. It may seem obvious, but the bigger your business is, the more important liability protection becomes. Bigger businesses have more clients, more points of operations, and, accordingly, higher liability risks. If you're a small-time operation with a single client, it may not be as important.
Opportunities for negligence. Some businesses have more negligence-related vulnerabilities than others. For example, a contractor making home repairs can make any number of mistakes that result in someone else's injury. A web designer doesn't have the same concerns.
Debts and financial liabilities. It's possible to start a business for less than $100 if you're in the right industry and you lean on free online resources. But some businesses require thousands, if not millions, to get going. If your business is going to take on massive amounts of debt, you need to personally protect yourself.
Personal tolerance for risk. Finally, you'll need to think about your own tolerance for risk. The younger you are, the fewer dependents you have, and the fewer assets you have, the higher your risk tolerance is.
Overall, it's likely in your best interest to pursue some kind of liability protection. Thankfully, it's relatively easy (and inexpensive) to start. Set up an LLC or corporation for your business and invest in general liability insurance; these two steps alone can go a long way in protecting you personally from your business's potential liabilities.