Mary had never been
satisfied with the moisturizers and skin creams that were available in the drug
store. They were too expensive or had synthetic ingredients. She dreamed of
making the kind of products that she would want to use herself.
Mary made her dream
come true: she started her own cosmetics business. Her husband was willing to
cut back on his hours and the kids were old enough to take care of themselves,
so Mary thought, "Now is the time!"
Mary started making
her own cosmetics in her kitchen, and the business grew. Soon she had to move
her company to an office complex and she was grossing over a million dollars a
year.
Sounds like success! But one day Mary got a letter from a lawyer. A customer claimed that Mary's product
made her ill. She was suing Mary's company for millions.
This type of claim is
perhaps an inevitable consequence of success: you and your company become a
target for claims. Some may be legitimate; others may not. But you will have to
respond to them all.
How do you protect
yourself? If you're sued, you need to get legal representation. You can also
take steps before disaster ever happens.
Get incorporated. According to Bizstats.com, over three-quarters
of all U.S. businesses are structured as a sole proprietorship or partnership.
For these entities there is no legal difference between the business and the
individual, and the owner is personally responsible for all liabilities.
Corporations are
legal entities separate from the owners. In the event of a liability, the
corporation is responsible, not the owners. If Mary's company is incorporated,
then she is not personally liable for the company's debts. (There are
exceptions--if Mary borrows money for her small business, the bank may demand
as collateral her personal assets such as her house.)
Costs for
incorporation vary according to the complexity of the business and how much
work you are willing to perform yourself. State filing fees can total from $100
to $500. Attorney's fees can be anywhere from $500 to thousands. However, there
are now online sources for incorporation documents, and forms are also
available through your Secretary of State office.
Get business
liability insurance. If you have
a small business, you need to protect your company's assets the same way you
protect your car or house--with insurance. There are three basic types of
business liability insurance:
General liability
insurance protects your business from property damage, injury claims, and
advertising claims. Also known as Commercial General Liability (CGL), it's the
most basic type of insurance for small businesses.
Product liability
insurance: If you sell a product (like Mary sells cosmetics), you may need
product liability insurance. This will provide protection in the event that a
customer brings a claim against your company based on a perceived problem with
your product.
Professional
liability insurance: Providers of professional services may consider having
professional liability insurance, known as errors and omissions. This coverage
protects your business against claims of errors, malpractice, negligence, and
omissions. For some professions it is a legal requirement to carry such a
policy.
If you take the right
steps while your business is growing, when these challenges arise you'll be
prepared!
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