Five Ways to Protect Your Business from Liability

Hi Legacy Builders. Welcome back to my channel. I’m Jenn McNeely with JWM Designs & Marketing, and in this post, I am going to talk about five ways you can protect your business from liability. If you are new to my blog, I like to provide tips, tools, and ideas to current and aspiring business owners that I believe will help you maximize your time and resources. As I meet with entrepreneurs and solopreneurs both online and in person, one common concern I hear from them is how to protect themselves and their businesses from liability. Generally, to be liable for something means you can be held financially responsible for an event or incident that occurs due to something you did or failed to do. Think of it this way, if an action taken by your company negatively alters another person’s life or business, they can sue your company. While I can’t go over every way you as a business owner can protect your business, in this post, I will highlight my top five tips to get you started.

Why Now?

For many new business owners, the concept of liability is relatively new to them. Conceivably for most of you watching, you’ve probably worked for a corporation with a legal department that handled issues related to protecting the business from lawsuits and other business and legal compliance matters. But now that you’re operating your own business, you need to be aware of essential compliance requirements and regulations. Unfortunately, the “I didn’t know about that” response won’t cut it. But don’t be dismayed. There are so many resources available to you, and I hope that this video will provide you with an initial roadmap to get started. So let’s get into it.

Four Main Risk Categories

Unless you are going into business with someone else, you will wear many hats when you first start as an entrepreneur. You will have to be CEO, CFO, Administrator, HR, Marketing, etc. When you work for yourself, It is your responsibility to keep things running smoothly. As part of your ongoing duties, you have to take whatever steps to limit risks to the business and personal interests. Before I give you tips on ways to limit risk in your business, I want to explain the four main risk categories you need to watch for:

  1. Financial Risks– Risks related to defaulting on financial obligations with lenders or creditors. (i.e., defaulting on a loan, foreclosure).
  2. Business Sustainability Risks – Occurs when the business cannot generate enough cash flow to operate. (i.e., cant pay vendors for supplies or service providers).
  3. General Systematic Risks – Risks applicable to all business owners regardless of industry. (i.e., recession, natural disasters, pandemic, military conflict).
  4. Industry-Systematic Risks – Risks applicable to businesses within your industry (i.e., government regulations outlawing your product or service)

So how can you, as a business owner, combat these risks…

1. Create a Separate Legal Entity

In my opinion, creating a separate legal entity for your business is by far the most significant step you can take to protect your business and personal assets. This step is vital for many reasons, the main one being liability protection. I’ve done a few videos explaining the most common types of business entities and the pros and cons. If you are familiar with my blog, you know that I am a big fan of Limited liability Companies, LLC. By default, if you have not formally established your business by registering with your state, you are operating as a sole proprietorship or a general partnership (if you are in business with another person). You can be held personally liable under these two business structures if your company gets sued. More specifically, if you are found at fault, your personal assets like your home, bank accounts, and personal property can all be seized to pay a court judgment. However, as the name suggests, having an LLC will limit liability to your business if your business is sued. That is because an LLC is legally recognized as a separate entity. Each state has specific rules as to how and where you can register your business, and I encourage you to speak with a legal professional licensed in your state to discuss the best business structure for you.

A quick word of caution: You can lose liability protection with your LLC if you are not diligently operating the company separate from your personal interests. Things like personally guaranteeing a business loan, signing a contract in your name and not in the business’s name, using your company to commit a crime, not using separate accounts for your business and personal finances, or failing to file annual registration documents for our business can all result in you no longer having liability protection.

2. Invest in Professional Help

I am all for DIY for many aspects of starting and running a business. However, some tasks require the expertise of skilled professionals. For example, when it comes to legal or accounting matters, it is always a good idea to seek professional assistance to comply with the rules and regulations associated with your business. It can be tempting to think that as an entrepreneur, you can take on all of the responsibilities of starting your business, but do you really want to chance of potentially getting it wrong. Taking control of your business by delegating specialized tasks that are outside your realm of knowledge and expertise is not only a smart move; it provides an extra layer of protection for you and your business. Most professional service providers like accountants, lawyers, and insurance brokers are highly regulated, required to maintain high professional standards, and can be held responsible for failure to meet those standards.

Most states require professional service providers to register and maintain licenses to operate within the state. To find professional business help, you can check with your state’s governing boards for professional organizations and associations to access a list of registered service providers. In addition, look for reviews online and with local organizations to find professions specializing in your industry. While I understand hiring a lawyer or accountant is a significant investment when you are just starting out, it is well worth the peace of mind you get when you know your business is founded on a solid structure.

3. Responding to Customers

Have you ever gotten a bad review online, or a customer demanded a refund when you did not believe the situation warranted issuing one? It may be tempting to ignore customer complaints online or negative reviews, but it’s never a good idea to leave matters unresolved. Most lawsuits against businesses occur when customers feel that a company has not adequately responded to their concerns. A surefire way to escalate a complaint to a full-on case is to leave a customer feeling ignored and mistreated.

While I am not an advocate for the saying “the customer is always right,” I believe that as a business owner, you have to be professional and seek some form of resolution when addressing a customer’s complaint. Sometimes simply explaining the extenuating circumstances which lead up to the conflict can help alleviate any negative feelings the customer may have had toward you. Other times, you may need to respectfully disagree with how the customer interpreted the situation while at the same time extending an olive branch in the form of a discount or refund to resolve the conflict.

After investigating the merits of the customer’s criticism, it could very well be that they have a valid point. You may need to make some procedural changes to correct the issue so that you don’t repeat it with the next customer. You also need to be prepared to take responsibility when you fail to meet the customer’s expectations. That can happen to anyone regardless of the company’s size or how long you’ve been in business. My biggest takeaway is that you can’t let conflict go unaddressed. Face it, address it, and move on. The worst thing you could do is ignore it.

4. The Contract is King

When you run a business, you will encounter several types of contracts. For example, if your company provides a service, you will likely have a services contract for your customers. If you decide to hire a full-time employee or an independent contractor, you need an employment contract or a work-for-hire agreement. You will likely need a vendor/supply contract if you use a wholesale vendor for supplies. You will probably have a lease or rental agreement if you rent space to conduct your business. Finally, if you run a website for your company, you will need to include a website user agreement to your site to comply with most state and federal regulations.

If you learn nothing from me, please, for the sake of your business, don’t use a one-size-fits-all contract you downloaded from the internet!

I often see it, and I cannot tell you how much these internet contracts put you and your business at risk. Hiring a professional service provider like an attorney to help you organize and structure your business is vital. When it comes to contracts, it can mean the life or death of your business. Contracts are the rules of the road for any relationship your business has with other companies or individuals. They help to reduce disputes and give you a road map for how to resolve conflicts should one arise. They put everyone on the same page concerning the duties and responsibilities of each party subject to the contract. If a dispute requires court intervention, a judge will look at the four corners of the contract when making decisions about liability. Do not skimp on making sure your contracts are solid.

Sidenote: Always get contracts in writing. Do not rely on the memory or word of anyone to fulfill their part of the bargain. In most instances, a judge will not allow evidence of any verbal agreement to be presented when resolving a dispute. If it’s not in writing, it didn’t happen.

5. Protect Your Data

When protecting your company’s data, there are two types of data I am referring to. The first type is the data you receive from your customers, vendors, and partners. Credit card numbers and other personal identification information should be encrypted and kept on secure servers loaded with antivirus and other security software. Having monthly backup files to maintain data should your systems be hacked or inoperable is also essential. Data breaches happen more often than you think, and it is your responsibility to protect the sensitive information you receive from third parties. In addition, your business can be sued for failing to take measures to protect the personal and financial information it handles.

The second type of data protection is data specific to the internal workings of your business. This includes your company’s intellectual property assets, client lists, trade secrets, or internal methodology. Some ways to protect this sort of data are limiting access to it, registering your intellectual property assets with the correct federal agency, and using confidentiality agreements to keep private information from being widely shared.

Bonus Tip: Get Business Insurance

Although not required to start or operate a business, having business liability insurance can go a long way to protecting your financial future should a dispute arise. There are different insurance policies based on your industry and your business needs. A general liability policy that protects against personal injury, advertising/defamation, negligence, or property damage claims is about all you need for most small businesses. However, you may need a more robust policy if you manufacture products or provide a professional service like a lawyer or accountant. I encourage you to do some research based on your industry and then contact an insurance broker to get additional details on a policy that works for you.

Is this really necessary if my business is new and small?

You may be thinking, Jenn, this is all well and good, but my business is small and new. I don’t need to be concerned about liability or insurance until I make a profit. I hate to break it to you, but that is not true. In a recent study, approximately 43% of small businesses are threatened with a lawsuit, and roughly 36% to 53% of small businesses are sued every year. I don’t say this to scare you but to make you see that it is never a bad idea to alleviate risks to your business regardless of the size or how long it’s been in existence. After getting your business off the ground, I know the last thing you want is a lawsuit. So today, my goal is to get your mind thinking of ways to avoid that outcome. It’s never too early to protect yourself from liability.

Let’s Recap

In this post, I talked about the four types of risks associated with operating a business and gave you five ways that you can reduce those risks. Those tips include creating a separate legal entity, hiring professional service providers for tasks that are outside your realm of knowledge and expertise, responding to customer feedback and concerns regardless of whether it’s positive or negative, using solid contracts tailored for your business, protecting your customers and business data, and as a bonus tip, obtaining some form of business insurance. While this list is not comprehensive by any stretch of the imagination, it is a solid starting point for any entrepreneur.

Your Action Steps

Your action steps are to review the tips I discussed in this post and take inventory of where you are in your business. Look at your contracts, make sure your business is structurally sound, and hire help where needed. Don’t wait to get started protecting your business.

Jenn McNeely

Jenn McNeely

Since I can remember, I have always enjoyed challenging myself to never be confined to one industry or career. Stepping out of my comfort zone and pushing myself to learn new skills has been a staple of my personality and my approach to life. My absolute favorite part of what I do is interacting with new people and learning more about their businesses and interests.

I help clients do more than set up a website. I help them launch their businesses. I am there for my clients before, during, and after the launch to be a resource to them. My goal is for my clients to see a return on their investment of time and financial resources. It is not enough for me to create a beautiful website for my clients. My costs are directly related to what I believe it will take to reach my client’s goals. This may mean that companies like [insert low-cost company name here] will undercut me with lower prices, but I’m okay with that. Often times their fees eventually surpass mine once you add in all the elements that I provide wholesale.

Growing your online presence from scratch takes time but when done correctly will generate great returns. I am a firm believer in transparency with my clients and want them to truly understand what it means to work with me. So, here’s to trusting the process and taking client’s businesses to the next level.

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