Liability protection. It’s something all business owners worry about, but in my experience the worry is often misplaced. Good insurance will cover most injury-type claims (slip and falls, car accidents). This article will outline when you should call your business lawyer to set up liability protections, both personal and business. I’ve also written about how to set up your business to account for these protections HERE.
So when why and when should your business call a lawyer to help with liability protection? I advise my clients using multiple criteria plus my personal experience doing this for over 20 years. Ultimately it comes down to the businesses ability to withstand economic pain if something goes wrong versus the transaction costs to set up a safe structure for the transaction and similar transactions going forward.
Some criteria I consider when advising business clients can be classified as:
· Vendor Contracts
· Product or service
· Liability and Asset protections
· Social / personal
Today’s article will discuss LIABILITY PROTECTION factors, that is, when do you need to have the clarity and protection of the laws set out clearly between your business and, well, pretty much everyone else. “Liability protection” is a broad tent that covers issues from accidental injuries to breach of contract, to protections from inventions or products that don’t work as intended.
Generally speaking, forming an appropriate business entity (or entities) for your particular needs, and maintaining those businesses as separate from your personal lives and assets, will protect your business assets from most claims (barring a rogue judge). These are the types of potential liability I discuss with my clients when helping them establish their businesses form. Types of business forms include holding corporations, operating entities, and leasing entities; joint ventures, professional corporations, and Limited Liability Companies also have their place.
Most business owners worry, in my opinion too much, about accidental injury lawsuits depleting their assets. However, a good business insurance policy will cover pretty much any claim: auto accidents, slip and fall at a business premises, worker’s compensation injuries. This is where a good business insurance broker can be more valuable than a good lawyer (of course, we work in tandem to asses potential risks and set up the business form appropriate to those risks).
I will also advise a client to undertake liability protection measures where the product sold or service offered, no matter how small could have devastating consequences if something went South. I was talking with someone this morning about a skin-care business where the owner was cooking up recipes in her basement. Imagine if a mis-mixed batch of skin creme was put on the market that could burn the skin or give a rash?
Liability can arise out of a customer’s use of your product, or even a non-related third party’s exposure to it. What is the product being sold? Is it a dangerous chemical, a machine that can easily injure someone? Is it software that if not used or written properly can have an adverse economic impact on its users? Is it a dangerous activity such as construction? The claim can be something as simple as repairing a leaky window you installed, to something as complex as a lung injury from someone who inhaled your product.
BREACH OF CONTRACT
In my opinion, business owners don’t spend enough time thinking about what would happen if they can’t fulfill a contract. There are liability protections that can be built into contracts. For example, the Uniform Commercial Code, the UCC, allows businesses to limit liability for breach of contract on a spectrum from no liability at all, to cost of replacement, to unlimited liability. The UCC also allows for special or limited warranties to be put on products sold to the public. Go over your business contracts with a qualified lawyer like myself to see if you have these built-in protections, or if they are available to you. A missed deadline on your part can domino down the supply or manufacturing chain with unanticipated, devastating consequences to your business if you are found liable.
HIGHLY REGULATED FIELDS
Nowadays it seems like everything you touch, smell or see is regulated. But some fields are so regulated that liability and asset protection are a must when establishing the business. Professions such as doctors and dentists; pesticide manufacturing; commercial transportation; even food preparation is being regulated with the recent Food Safety Modernization Act, many of which rules are kicking into gear this year.
VALUABLE INTELLECTUAL OR REAL PROPERTY
Often the most valuable asset a business may own is the property it uses to operate its business. Intellectual property can have tremendous value to someone, even if the originator or initial user of the IP doesn’t monetize it well. Real property (including real estate and valuable objects) should be kept separate from the business if at all possible. One, this can protect them from creditors; and two, they can be spun off separately and/or monetized separately from the initial user’s use of the property.
As I said, I discuss all of these factors and many more when advising clients on business liability protection. If you have any questions on this, and are in Asheville or Chicago, call me at (312) 671-6453.