Regardless of which type, all insurance boils down to liability for a small business owner. Simply put, liability is about determining who is responsible when something goes wrong.

For example: if a customer with a food allergy gets sick at a restaurant, who will be held liable? In most cases, we might assume that the restaurant would be held liable. However, this becomes cloudy if the allergen was clearly marked on the menu. Liability is not always a black and white issue. Most times, it exists in a gray area.

Many business owners will limit their liability using the following methods: separating their personal assets from the business, a waiver of subrogation, or by using a Hold Harmless Agreement.

How do you Limit Liability as a Small Business Owner?
How do you Limit Liability as a Small Business Owner?

What is Limited Liability?

When a business is found liable, an owner’s personal assets could be impacted. This is why limited liability is important. Limited liability allows for a business owner to keep their own assets separated from the business. This means if a business is sued and found liable for paying damages, only the business will be impacted. In this way, neither the owners or any other investor’s personal assets are at risk.

Anyone suing a company for damages of any type cannot seek more than the value of the assets held by the company.

Acquiring limited liability status for your business is not always necessary. However, if your business owns property or you feel a lawsuit may exceed the value of your insurance, acquiring this status is a good idea. That said if your business grows much larger and you intend to offer stock options and gain a wide range of public and private investments, setting your business up as a traditional corporation will work. Corporation status also provides limited liability status.

What Does It Mean to Have Limited Liability?

Limited liability status means having your business investments and personal assets legally separated. This status is often contingent upon keeping up with certain requirements, as determined by your state. Every state varies in what it requires, although most have similar rules for setting up and maintaining a business as a Limited Liability Company, or LLC. This also involves ensuring that the business is well funded along with keeping all documentation up-to-date.

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