ABC’s To Minimize Corporate Liability

At a high level there are four ways to minimize the corporate liability for a business.

  1. Select the right legal entity and number of legal entities for a business.
  2. Put the right contracts in place.
  3. Develop cost effective business practices to minimize liability.
  4. Select the right insurance coverage and limits.

There is never a one size fits all when it comes to minimizing the corporate liability of a business. Each business needs a personalized assessment to minimize their liability. The goal is not to eliminate liability, but to minimize it in the most efficient and cost effective manner. Below I will discuss and expand on the four different ways to minimize the corporate liability for your business.

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 a business liability or loss. For a business entity to be able to protect your personal assets, you must respect the business entity and the business must operate as a real business and not merely as a shell company. Your business accountant can assist in making sure that the business is operated correctly in form and substance.

Currently, the most popular business entities chosen are a C-corporation and Limited Liability Company (“LLC”). The business objectives and the desired outcomes from a liability and tax perspective will dictate which business 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 business and in some circumstances it may be beneficial to incorporate in another state.

While it is important to pick the right business entity and the state of incorporation, it is also important to decide if you need more than one business entity for your business enterprise. Typically, if a certain business entity is liable for a liability or loss, only that business 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.

Put the right contracts in place.

As to the people and businesses that provide your business with goods and services, you are usually in a position to ask them to sign your 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. As to your customers and/or clients, 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 your business is only liable for the damage or loss your business creates.

Develop cost effective business practices to minimize liability.

For each business 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.

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.