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Business liability insurance is a must for virtually every business. Even if you think the risks of a lawsuit are slim to none, the possibility still exists. A client slips and falls on an icy sidewalk, a customer's order is not delivered on time, or an employee is involved in an auto accident while on a business errand. Each of these can result in a claim for damages by the injured party.
But is business insurance enough to protect your personal assets? Not necessarily.
If you operate your business as a sole proprietorship, your liability for claims against your business is unlimited. If a claim exceeds the amount of your business insurance and business assets, the injured party can sue you personally to recover damages, and those claims can be taken from your personal assets-your savings, your home, and whatever else you have socked away.
By contrast, a corporation (whether it's operated as a C or S corporation) or limited liability company (LLC), offers you greater protection for your personal assets. Your personal liability for claims against the corporation is limited. As a general rule, a creditor, customer, or injured party can reach only your business assets unless you were personally at fault.
Bear in mind, however, that the operative word is limited. Simply setting up a corporation or LLC in not enough. The way you operate your business on a day-to-day basis is equally important.
One problem is that many small business owners neglect to put on their "corporate hats" when dealing with customers and clients. They may sign contracts in their own names, without making it clear that they are acting as agent of their corporation or LLC.
To properly protect yourself, all paperwork for the business-contracts, checks, stationery, forms, etc.-should be in the name of the corporation or LLC. When signing a contract for a corporation or LLC, the best approach is to make it clear that the contract is being signed "by" an officer/agent on behalf of the entity. For example, John Smith the owner and president of JS, Inc. would sign "JS, Inc. by John Smith, President."
It is also important to make sure that you or other employees who act on behalf of your business are expressly authorized to do so. Your corporate documents should spell out the actions that you and your employees are authorized to take on behalf of your corporation or LLC. Frequently, you will need to adopt a corporate resolution to authorize specific actions such as entering into a contract, leasing equipment or borrowing for the business.
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