Owning a small business comes with higher stakes, especially when it comes to lawsuits. Not only are they time-consuming and bad for your company’s reputation but as a small business owner, a lawsuit against your company could also mean loss of your personal assets.
In reality, misunderstandings, incidents, and mistakes that would mean trouble for larger organizations could cost you everything. However, there are ways you can protect your business from liability.
1- Purchase Liability Insurance
First things first, get liability insurance as soon as possible. Annual premiums typically cap out at around $2,000 per year which, in the grand scheme of things, is a worthwhile cost seeing as how it can help you avoid owing millions in a lawsuit.
The type of liability insurance you need depends on the nature of your business. However, all business owners should invest in General Liability Insurance which protects your company in the case of an accident, injury, or misunderstanding.
You may also want to purchase personal liability insurance if you have substantial assets. This is especially true if you operate as a sole proprietorship.
When selecting your insurance policy, make sure to carefully consider the coverage maximum. If this is too low, it could leave you open to serious financial trouble because you will be responsible for paying out anything over that limit.
2- Perform a Background Check on Every New Employee
Hiring employees is necessary for virtually every business but expanding your team also exposes you to risks. While you can’t know everything about a new employee, you can uncover important personal, criminal, and employment details that can help you avoid hiring high-risk individuals.
Fortunately, there are many companies that provide affordable small business background checks. Running a background check on every person you plan to bring onto your team can help you avoid hiring someone who might jeopardize the safety of your workplace or the livelihood of your company.
3- Separate Personal Assets from Business Assets
If you have not established a formal business structure, you should. Formalizing your business structure establishes your business as a separate entity. Don’t hesitate to set up separate bank accounts as well.
It is a fairly simple process that protects your personal assets from responsibility for business liabilities and debts. However, it does not relieve you of all liability. You will be held personally accountable if:
- You commit a crime while running the business
- Sign a contract with your name instead of the business name
- Your actions lead to an injury
- You fail to maintain good business standing with the proper authorities
Every small business owner should have a basic understanding of the differences between business and personal liability.
4- Establish Good Recordkeeping
Documenting every aspect of your business might seem time-consuming but it is a proactive measure that could prove highly beneficial should you ever run into any legal trouble or are audited by the IRS. You should also make sure that you keep your licenses current. Any gap could have serious consequences.
Paper copies can get destroyed or lost so make sure to always have electronic records of business documentation and that aren’t kept on just one computer’s hard drive. To best protect yourself, you will want to keep track of:
- Receipts for expenses that you plan on writing off
- Documentation pertaining to your business’ income
- Proof of payment for Estimated Tax Payments
- Accounting ledgers and journals
- Personnel files on all employees (for at least a year after termination or resignation)
That being said, make sure you always get everything in writing. From customer complaints to incidents with employees, nothing is insignificant. Keep in mind that even the most casual agreements you make with other parties could come back to haunt you.
5- Have an Attorney on Retainer
If you can afford to hire an attorney, you should. With a business law attorney to provide guidance, you can better navigate any issues that do arise or even prevent them from happening in the workplace.
Your attorney can advise you on your responsibilities as an employer and help you put safeguards in place to protect your business. From setting up the best business structure to workplace conduct, they have your back. They can also usually reference you to a reliable personal injury or workers’ compensation lawyer should you need one.
Don’t leave your business exposed to unnecessary risks, take these 5 steps to protect your business from liability.