A lot of small business owners don’t realize how liable they are when running their companies. Even if you don’t work in an industry where lawsuits are prevalent, like food and beverage, you still have a lot at risk. It’s important to understand what those risks are.
What Types of Businesses Are Liable?
Any business can be liable. Whether you’re a consultant, web designer, accountant, stylist or retail store owner, you are still at risk of being sued. Even if you run a teeny side business bringing in just a few hundred dollars a month, you’re still liable.
If you operate as a sole proprietor, you’re even more at risk, because there’s no shield between you and your company. That means that if your company were to be sued with a demand for legal fees, and your company couldn’t pay your bills, then the court could come after your personal assets.
Pretty scary, huh?
How to Reduce That Liability
While offering top-notch customer service will reduce the likelihood that you’ll have an angry customer who wants to sue you, that’s no guarantee. A better option is to choose a business structure that separates you as an individual from your business. You have a couple of options here.
Both of these options create a type of umbrella that protect your personal assets. This means that if you are sued and you’re operating as one of these business structures, then your home, savings, cars or other assets can’t be touched to pay your business debts.
The S Corporation
Any corporate business structure will protect your personal assets. The majority of small businesses seeking reduced liability through incorporation opt for the S corporation because it has some other great benefits, including pass-through taxation. There are a bit more hoops to jump through with the S corp, as you are required to have a board of directors and annual board meetings, as well as file paperwork to remain compliant.
Forming a limited liability company (LLC) also protects your personal assets. It has many of the same benefits of the S corp, with a little less formality and requirements. However, should you plan to seek funding from investors, you’ll likely find that they will prefer you to operate as a corporation, not as an LLC. The LLC doesn’t restrict the number of owners you can have, whereas the S corp limits you to 100.
What You Need to Know About Personal Liability
Once you’ve incorporated your business or formed an LLC, you can relax with the peace of mind of knowing that you’ve taken an important measure toward protecting your personal assets. But you’re still not completely safe. Here are a few other things you need to know about personal liability:
- If your business entity is noncompliant, then your assets become vulnerable. That’s why it’s important that you file the annual paperwork required for your corporation or LLC, as well as pay any renewal fees necessary to stay compliant.
- When you personally guarantee a business loan, you’re still responsible for the debt. If your business misses a payment, you personally are still responsible, even if your business is a corporation or LLC.
- When you sign a business contract under your name, you’re responsible. If possible, sign all contracts with your business name to reduce your personal risk.
- If you commit a crime, you can’t hide behind your business structure. You as an individual are still beholden to state and federal laws, and will be prosecuted accordingly.
As you can see, your personal liability is nothing to take lightly. Take the appropriate measures to protect yourself by choosing the best business structure, and keeping it compliant.