Those of you in businesses that involve an elevated risk of personal injury—for example, the whale watch industry with its slippery decks and hazardous submerged rocks—know how to evaluate your exposure to liability and how to limit it. But, I am often surprised at how many business owners do not protect themselves adequately. I know of a recent serious injury at a bed and breakfast in town where, if there had been a claim, the only real question would have been how much the injured party should receive, not whether the bed and breakfast is liable. Yet, such businesses operated as sole proprietorships are not uncommon, putting the owner’s personal assets at risk.
Every business should evaluate what liability the business could generate. Businesses that sell a product or service should consider what could happen if the product or service is defective. Businesses open to the public should consider the possibility of a patron’s personal injury while on the premises. Other forms of liability exist. And, defending against ultimately unsuccessful claims can also be expensive. Even if the possibility of significant liability is remote, that remote possibility could be financially disastrous for you and your family.
There are two ways to protect yourself from liability: proper insurance and a liability shield. Properly insuring a business usually requires a professional evaluation of the types of risk your business could incur. For common businesses, your insurance agent can be of assistance. In some cases, you may wish to review your insurance with your attorney. Insurance pays for defense against a claim as well as any resulting judgment against you.
Without a liability shield, your personal assets can be reached to satisfy any judgment against you that exceeds your insurance limits or is outside of its coverage. Properly implemented, a liability shield will limit the reach of the judgment to the business’s assets. Creating a shield is easy, so virtually every business should do so.
There are many business forms that contain a liability shield, e.g. corporations, limited partnerships, and limited liability partnerships. But, for an existing sole proprietorship (a single person running the business) and for simple partnerships, where the only goal is to create a shield, the easiest entity to create is the limited liability company or LLC.
One can create an LLC online at the Washington Secretary of State Website. Once you have formed your LLC, fill out a master license application with the state at http://www.dol.wa.gov, get a tax id number from the IRS for the LLC, open a bank account for the LLC, and you are up and running. In most cases, forming an LLC from a sole proprietorship or partnership has no tax effects.
In order for the liability shield to be effective, you must adhere to a few simple rules. First, you must treat your business as a separate entity. Do not buy your personal items with the business accounts or your business items with your personal accounts, and avoid using personal assets for your business or business assets personally. Second, you must properly capitalize and insure the business. If you are treating your business as a separate entity and you have a professional analyse your insurance needs, you should be good here. If the business is a corporation, you should consult with an attorney to be sure you are following the proper formalities.
A small amount of work now could very well save your financial future.
This website provides general information to the public on legal issues. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. You should contact Brandli Law for advice on specific legal problems.
Copyright 2015 Brandli Law PLLC