At a high level there are four ways to minimize the corporate liability for a business:
- Select the right legal entity and number of legal entities for a business.
- Put the correct contracts in place.
- Develop cost-effective business practices to minimize liability.
- 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 its liability. The goal is not to eliminate liability, but to minimize it in the most efficient and cost-effective manner. Below I will discuss the four different ways you can minimize the corporate liability for your business.
1) Select the right legal entity and number of legal entities for a business.
“There are situations in which it may make sense to form multiple business entities, or to incorporate in another state.”
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 a number of other business entity types exist 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 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 expose—and not the assets of your other businesses. Of course, 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.
“Your contract should have favorable terms and conditions as it relates to your business.”
For 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 position gives you an advantage 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. For 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 so that your business is only liable for the damage or loss your business creates.
3) Develop cost-effective business practices to minimize liability.
There are always cost-effective ways to conduct your business to minimize your liability for each business type. This analysis is very case specific, and most of the time an attorney’s help is not necessary to figure out how to operate your business in a manner to minimize your liability. However, an attorney may help you to better understand your risk and/or liability, so that you can determine if changing the way you conduct business makes sense from a cost / benefit perspective.
4) Select the right insurance coverage and limits.
“Often considered a necessary evil, in certain situations insurance can save you and your business.”
Sometimes—and this will happen—the first three ways to minimize the corporate liability of your business will fail. Then it is crucial to have the right insurance coverage and limits already in place. While insurance is considered a necessary evil, in certain situations it can save you and your business. While determining what coverage you need, with the right limits and deductible amounts, can be very complicated and time consuming but it is absolutely worth the time and effort. Never fail to get your insurance coverage and limits correct for your business.