Liability management is often a motivating factor behind the decision to incorporate.
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Companies believe (and rightly so) that incorporated business entities create a sort of firewall between the corporation and the personal assets of its major stakeholders.
However, incorporation alone isn't enough to protect your personal assets from the liability issues that are associated with business ownership. Regardless of whether you're a corporation, sole proprietorship, partnership or LLC, there are several other practices that can go a long way toward managing and minimizing your business liability risks.
- Maintain good standing. Corporations and other business entities are like cars; if you take care of them, they'll take care of you. The simple fact is that any business requires a certain amount of maintenance. By maintaining solid accounting systems, personnel records, corporate documents, licensing, and other housekeeping items you can inoculate yourself and your company from liability.
- Obtain liability insurance. A healthy liability insurance policy is one of your best bets for liability protection. As a business owner, it's up to you to make sure your company has appropriate levels of general, professional and product liability insurance. Additionally, if you're a corporate entity you will need to maintain Directors' & Officers' insurance to protect your board from shareholder litigation.
- Review contracts. Since contracts are often at the center of corporate lawsuits, it just makes sense to go the extra mile in reviewing any contracts related to your business. The review process should ensure that all of your contracts are indemnified to limit your exposure.
- Tighten policies. When it comes to business liabilities, policies are your friend. Everything from safety to human resources should be codified in policy form. But policies are only as good as their enforcement, so it's vital that everyone in your company be aware of the policies and follow them on a consistent basis.
- Document everything. There is no such thing as too much documentation in risk management. A good rule of thumb is to approach every decision you make as if it could be called into question in open court. The more documentation you have to support your decisions, the more likely it is that you'll be able to defend yourself and your company from liability claims.