Protecting personal and business assets

Protecting personal and business assets

A customer is about to enter your business on an icy Iowa day, slips and falls, breaking a bone… A diner in your restaurant gets sick after eating your special of the day… A shopper in your establishment trips over a loose carpet, falling against a shelf and cutting his arm… You are thrilled to have a new light fixture installed in your lobby — until it falls on a client and breaks her nose…

… And, next thing you know, you are being sued and wondering if you will lose your business, your home and your life’s savings.

No doubt, accidents happen. However, if you have taken the right precautions, you can breathe a little easier knowing your personal assets are safe, and your business will survive.

Protecting your personal assets begins at the beginning — with setting up your business in a structure that will keep your personal and business finances separate.

When business owners incorporate their business or create an LLC (Limited Liability Company), then their personal assets are not at stake if the company gets sued. If that customer’s broken bone requires surgery, followed by physical therapy, long-lasting pain, and inability to work, at least you can rest a bit easier knowing that Junior’s college fund isn’t going to get wiped out.

However, for those whose businesses are structured as sole proprietorships or partnerships, their personal assets can be in danger in a lawsuit. Not only might they lose the college fund, but they might also lose the Christmas shopping fund and the proverbial roof over their head.

“The most important legal tip I share with business owners is that you need to set up an LLC or a C or S corporation,” said Kimberley Baer, Baer Law Office, 838 Fifth Ave., Des Moines. “The reason for this is that it protects your personal assets. If you are not set up as a company or a corporation, and someone has a claim against the business, the person who has a claim can also sue you personally. There are a lot of people out there operating as a sole proprietorship, and this offers you no protection for your personal assets in Iowa.”

Because of liability issues, sole proprietorships are becoming increasingly less common, said Michael Jones, Patterson Law Firm, 505 Fifth Ave., Suite 729, Des Moines.

The cost of setting up an LLC is far less than the cost of defending a lawsuit.

“A lot of law firms will help you set up an LLC for less than $500, so the cost is not as high as a lot of people expect,” said Baer.

Once a business is structured to protect personal assets, the business owner needs to have insurance. A comprehensive general liability insurance policy will cover a wide variety of issues and is essential, said Jones. For example, it covers premises liability.

“If someone slips on the sidewalk or takes a product, eats it and gets sick,” the insurance will “provide a wealth of coverage,” said Jones.

The standard policy will provide for the cost of defending against a lawsuit.

Baer concurs, adding that property insurance for an office building is essential even if the business owner is leasing.

“It is important in case someone trips or falls and breaks their leg or has some type of accident on the property. With the Iowa winters, we see a lot of claims arising from falls and injuries on the ice and snow,” she said.

“People hate paying for insurance, but if you are really determined to protect your business assets, you need it,” said Jones.

Liability insurance policies tend to set a cap on the amount that they will cover. If someone sues and is awarded an amount higher than the policy’s limit, then business assets may be at risk. To help mitigate this risk, Jones said business owners should consider an umbrella policy that would cover a certain amount above the liability insurance limits.

In addition, professionals such as doctors, dentists, architects, engineers and others not only require general liability insurance to cover their business, but also require professional liability coverage in case they are sued for malpractice, said Jones.

Larger companies often have risk managers on staff to evaluate the risks of getting sued and implementing ways to avoid lawsuits, said Jones.

“The bigger companies can afford the cost of having risk managers to try to prevent bad things from happening before they do,” he said.

For example, construction companies often have safety experts who inspect work sites.

Some insurance companies have risk-control specialists inspect businesses, and owners of smaller businesses can benefit from their services, said Jones.

Perhaps the most effective means of warding off lawsuits is to have “effective management,” said Jones. “From a legal aspect, the quality of management — the degree to which it takes safety seriously” plays a large role.

Jones uses QuikTrip, a client of his, as an example of a company that “takes risk control very seriously,” adding that management routinely inspects the property, inside and out, looking for any concerns.

The U.S. Small Business Administration suggests that a business’ management team have regular meetings to discuss risks so that the topic is addressed on a regular basis. It also advises business owners to “create a checklist of the physical building that includes areas of upkeep, needs and repairs.” A monthly walk-around is recommended to “note areas that require attention, as is a “weekly review of the facility for less significant items.”

Perhaps contrary to what people may think, Jones said that juries tend to side with businesses that demonstrate they take safety seriously by having a plan and implementing it.

Slips and falls regularly result in lawsuits against establishments, but “the jury doesn’t expect the business to be perfect,” he said. For example, if a business has a plan to deal with icy conditions — such as routinely spreading ice melt or having a contractor who does that — and the plan has been carried out, then a jury may not find fault for a slip when the weather conditions are bad.

Similarly, if someone trips on an uneven sidewalk, “the jury wants to see if it’s been like that forever, which would indicate the management of the property hasn’t taken property maintenance seriously.”

Having written procedures related to safety “does some good, but you have to follow them,” said Jones.

Security cameras are playing an increasing role as evidence in determining liability, said Jones.

While cameras were originally installed at many businesses such as QuikTrip years ago, they were primarily meant to help identify robbery suspects, said Jones. Now, QuikTrip and many other businesses “have gone to comprehensive cameras that can capture the inside and outside of the business. Those are very effective,” he said, adding that the footage usually helps the business being sued, not only by showing what happened, but also showing the safety standards being enforced.

If you’re doing a good job, you shouldn’t be worried about the camera,” said Jones.

In fact, cameras are so common these days that juries tend to be suspicious if there is no camera footage presented, he said.

As the business world and technology change, so do liability issues.

While many business owners are aware and concerned about their computers being hacked, many may not realize that a data breach can lead to the business being sued if a customer’s personal information is accessed. Insurance is now offered to protect businesses from such a lawsuit.

“Cyber insurance is becoming a more popular add on,” said Jones.

However, business owners should do more than just get insurance. The SBA advises business owners to mitigate the risk, as they would with any other potential liability issue.

“The common belief that small businesses … are too small or ‘unknown’ to be targeted by cyber criminals needs to end. Every business that depends on a computer system and the Internet is a potential target,” the SBA advised in an article called “The ‘It can’t happen to me’ mindset must change about Cyber Security.”

“Small businesses are targeted because cyber criminals know most don’t have the financial resources or know-how to protect their data, intellectual property, transactions or websites from being compromised,” the article continued.

The SBA offers advice on some practical steps business owners can take to reduce risk, such as keeping operating systems and software updated, training employees to identify possible threats and avoid them, restricting admin privileges, removing non-essential software, maintaining strong password protections, etc. And, since a risk will still exist, it recommends cyber security insurance.

As with all potential liability issues, no amount of prevention and care can protect business owners from a potential lawsuit. The risk of an injury on the premises or of a cyber breach cannot be totally eliminated. However, experts agree, having the appropriate insurance can help protect a business owner from a catastrophic loss. ♦

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