There is never a one-size-fits-all solution when it comes to minimizing corporate liability — each business needs a personalized assessment. The goal is not to eliminate, but to minimize liability in the most efficient and cost-effective manner. There are four ways to accomplish this.
1. Select the right legal entity and number of legal entities for a business.
When a business entity is formed and operated correctly it can protect your personal assets from liability or loss.
For this to happen, you must respect the entity and it must operate as a real business, not merely as a shell company. Your business accountant can assist in making sure that the company is operated correctly in form and substance.
There is never a one-size-fits-all solution when it comes to minimizing corporate liability.
Currently, the most popular business entities are the C-corporation and the limited liability company (LLC). The business objectives and desired outcomes from a liability and tax perspective will dictate which entity will fit your business. It should be noted that there are a number of other business entity types that may be appropriate for your organization, and in some circumstances it may be beneficial to incorporate in another state.
While it is important to pick the right business entity and state of incorporation, it is also important to decide if you need more than one business entity for your enterprise. Typically, if a certain business entity is liable for a liability or loss, only that entity will be liable for the incurred liability or loss. Given this reality, there are situations in which it may make sense to form multiple business entities, so if there is an incurred liability or loss to one of your businesses, only the assets of that business entity are exposed and not the assets of your other businesses. The liability benefit of forming another business entity has to be weighed against the administrative cost to maintain the additional business entity.
2. Put the right contracts in place.
As to the people and businesses that provide your company with goods and services, you are usually in a position to ask them to sign a contract that has been drafted by your attorney. This is a great position to be in because your contract should have favorable terms and conditions as it relates to your business.
For the people and businesses that are your customers and/or clients, your ability to have them sign your contract is limited, and you usually have to sign their contract, which is usually advantageous to their business. In these situations, the best you can do is modify their contract in a manner that makes your business liable only for the damage or loss it creates.
3. Develop cost-effective business practices to minimize liability.
There are always cost-effective ways to conduct your business to minimize your liability.
This analysis is very case-specific and most of the time you don’t need an attorney’s help to figure out how to operate your business in a manner to minimize your liability. An attorney may be helpful to better understand your risk and/or liability, so that you can make the correct determination if changing the way you conduct business makes sense from a cost/benefit perspective.
4. Select the right insurance coverage and limits.
When the first three ways fail to minimize the corporate liability of your business, and this will happen, it is crucial to have the right insurance coverage and limits in place.
While insurance is a necessary evil, it can save you and your business in certain situations. Determining what coverage you need with the right limits and deductible amounts can be very complicated and time consuming. That being said, it is absolutely worth the time and effort to get your insurance coverage and limits correct for your business.
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About the Author
Since 2002, Bryn Peterson has been delivering comprehensive legal support on a variety of corporate matters including contracts, mergers and acquisitions, real estate, insurance, risk management, capital projects, taxation and audits.
Bryn’s diverse legal background includes eight years as internal legal counsel for multimillion dollar corporations including Green Giant Fresh and Tree Top, and multibillion dollar corporation Darigold, Inc.
As internal legal counsel, he gained experience in a wide range of corporate legal needs, including managing outside counsel and associated costs. Bryn possesses the full range of qualifications to serve successfully in both in-house and contract capacities. His experience spans companies across varied sectors including technology, food/beverage and agriculture.
You can reach Bryn by phone at (206) 498-3354.