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If your business runs into serious difficulty, will it bring you down too?
For example, what if one of your employees got involved in a serious car
accident while working for you? Will the resulting lawsuit bankrupt you
Here are just a few ways of protecting yourself against catastrophic losses
1. Obtain Adequate Insurance Coverage
If someone slips on the sidewalk of your home and injures himself, he could
sue you for damages. Your tenant`s or homeowner`s policy may cover you for
liability in such an event.
However, what if it is your customer who falls on his way to visiting your
home-based business? You will need an extra rider on your house insurance
to cover such incidental business use. The extra charge for this additional
coverage is well worth it.
If you use a car for business use, insure it for such. Some people think
that they are being clever writing off automobile expenses for income tax
purposes but at the same time not informing the insurance company that the
car is being used for business.
This is false economy. If you ever get into an accident, police and insurance
investigators will certainly find out that you used the vehicle for business
purposes. If you`re not paying for business coverage, why would the insurance
company cover your claim?
As well, what do you think an income tax auditor would think of your claimed
business expenses on the vehicle when your insurance policy indicates personal
coverage only? Avoid this additional exposure to tax liability.
Be sure to obtain required workers` compensation coverage. Some have been
held responsible for all the medical and other expenses of an injured worker,
as well as fines for non-compliance to the law. These costs can be quite
substantial and even bankrupt you.
Consider obtaining product liability insurance. This applies not just for
any products you manufacture but also for products you sell that are made
2. Incorporate Your Business
Insurance may give you some protection against loss. However, you may suffer
business losses and lawsuits that may not be covered by your insurance fully.
An extra level of protection can be obtained by forming your own corporation.
Even though incorporating yourself will result in extra paperwork and costs,
it could be the best insurance you ever bought.
This is because the corporation is a seperate legal entity or person. Even
though you may own the corporation, if the corporation operates the business,
it is the corporation that will be sued or suffer loss.
If, for example, the corporation had severe business losses resulting in
debts that could not be repaid, the corporation would be insolvent. You,
as a shareholder, would lose your investment in the company but would generally
not be responsible for any of its debts. Thus, you would not have to sell
your home or other personal assets to cover the corporation`s liabilities.
On the other hand, there are cases where directors of a corporation can be
held responsible for liabilities if they didn`t act responsibly. You can`t
hide behind a corporation, commit criminal acts and expect to escape
Properly drafted written agreements can protect you in many ways. First of
all, they can sometimes prevent misunderstandings that can lead to legal
problems. Secondly, they may limit your exposure to lawsuits and losses.
Contracts can limit your exposure to liability by including provisions
restricting the scope of your work and responsibility, having disputes handled
by arbitration rather than through the Courts, and specifying that the maximum
damages payable shall not exceed the amount of the contract.
A special area to watch out for is the Internet. There are many laws that
impact on websites including matters affecting children, privacy, earnings
claims, and unsolicited e-mail ("spam"). Certain agreements and notices on
your website may help to protect you.
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