Two Minute Money: Protecting yourself and your business from lawsuits

Turner Cowles
Turner Cowles

Taking the leap to start your own business can be rewarding, but it also comes with risks. Make sure your business plan accounts for liability. How can you protect yourself and your business from being sued?

You’ve got options, and we talked to author and businesswoman Christy Wright about them.

Your first option is to incorporate. Most small, new businesses will incorporate as a limited liability corporation, or an LLC. “When you incorporate, it’s a way to legally separate your business from yourself,” said Wright. Becoming an LLC protects your personal and family assets from liability should you get sued. This is really helpful if you’re in a high-risky business, such as teaching horseback riding lessons—there’s a lot that could go wrong. The IRS and Small Business Association offer helpful guides for creating a limited liability corporation.

Incorporating isn’t free. Depending on where you live, just filing the articles of incorporation can cost anywhere from $100 to $250. Some states even charge a franchise tax, which LegalZoom calls a fee paid for “the privilege of doing business as a corporation” in a particular state. The franchise tax usually ranges from $800 to $1,000, but some states, such as Nevada, don’t have one, making it more attractive to new businesses. If you hire an attorney, you could also pay some pretty hefty fees there too.

Horseback riding is a high- risk sport—Any stable should have the proper insurance.

Another option is to insure. There are two main insurance options: product liability and professional liability insurance. Product liability insurance covers damage your product may cause. “If you sew dresses and leave a needle in a dress that harms a child, product liability protects you,” said Wright.

Professional liability insurance covers damage your service may do, like if you’re a hairdresser for a celebrity and you make a major error. Professional liability insurance is the same type of insurance doctors call malpractice. It can cover negligence, errors or omissions.

The cost of insuring your business depends greatly on what kind of product or service you provide.

You can be both incorporated and insured. Low-liability businesses, such as making handbags or hair bows, Wright says, are safe to operate as sole proprietors since there’s a low probability you could get sued. Six in 10 self-employed Americans are unincorporated.

“If your business gets really big, you could incorporate,” Wright said. “If you’re operating on a small scale, like $100,000 to $200,000 a year with low liability—revenue is good but not enormous—you can operate as a sole proprietor forever. Many people do.”

You can always incorporate down the road.

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