Small Business Liability: Are You At Risk?

NH Business Articles: Small Business Liability ~ Are You At Risk?

Small Business Liability: Are You At Risk?
Thinking Your Way Through The Landmines

by Therese Reger

In the litigious society we live in, every venture carries some risk. Even small businesses with a seemingly innocent product -- online video games, custom luggage, even an artisanal farm product -- run the risk of a lawsuit or a claim. Monsanto, the chemical giant, has a history of suing corn farmers who are suspected of illegally using its seed. How far are you from Iowa ???
  • If your business is operating as a sole proprietorship or partnership, like nearly 80% of small businesses in this country, you are personally liable for its debts and obligations.

  • You could be at risk if you signed a personal guarantee on your business. You might be sued if someone is injured while using your service or product -- even if you took the obvious precautions.

  • While attorneys will tell you that anyone can sue (disgruntled employees, customers, and competitors make the short list), it's possible to buy some peace of mind.
  • Inc. magazine has some advice on reducing the chances that you'll be sued by an ex-employee. The chief reason for lawsuits against employers, according to the Inc. story, is racial discrimination. The authors recommend that you take the time to prepare an employee handbook, covering such issues as workplace language and recourse that would be available to an employee who feels he or she was targeted for discrimination.

    You can also structure your business to protect yourself and your assets, by forming a Limited Liability Corporation (LLC) or a C corporation. These entities provide a corporate shield whereby a lawsuit cannot be presented against you as an individual.

    The other possibility is to buy business liability insurance. However, most small businesses do not have the financial resources to invest in low-priority items; only 2% of companies carry this type of insurance.

    Even if you are structured as an LLC or a C corporation, you are still vulnerable if you fail to observe certain common-sense practices, says Barbara Weltman, an attorney and author writing in a guest blog at the SBA.
  • Keep good records. Make sure your financials are up to date, and respect the distinction between personal funds and corporate funds. If your company owes money and you've had your hand in the till, "a creditor can argue that your personal assets should be available to pay outstanding claims," according to the SBA.

  • Be timely and meticulous about payroll deposits. Withholding employment taxes is the responsibility of the owner, and you can be held personally liable for employees' share of Social Security and Medicare if those payments aren't withheld and submitted to the proper agencies.

  • Most all businesses experience cash flow problems at some point. The SBA advises small business owners to let their other creditors wait and make payroll tax deposits first. (The IRS would no doubt concur.)

  • When you borrow money from a bank, try to avoid a personal guarantee. Although the bank holds the upper hand on this one, there are a few ways you can avoid seeing your own skin nailed to the wall. These include securing loans with company assets instead of personal ones; seeking financing from non-commercial lenders such as government grants; building your business's credit to the point where it can apply for loans on its own; and/or obtaining lines of credit from your vendors or suppliers.

  • In the heat of starting a business, it's easy to tell yourself that your personal guarantee is simply your statement of confidence in its future. But with the great majority of small businesses not making it to their sixth birthday, it's wise to build a wall between yourself and potential hazards.


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