Business Risk:Don't Make It Personal
You’re setting up a new business. You’ve established your LLC and diligently shopped for and purchased insurance to cover everything from a customer falling in your store to paying for losses if you have a data breach. You’re protected, right? After all, LLC stands for limited liability corporation, and the business is now insured.
But are you fully protected? It is imperative that you understand exactly where your business coverage ends and your personal liability begins. Because no matter what business structure you operate under—sole proprietorship, S corporation, C corporation, LLC, LLP—you can be sued and found liable as an individual in the right circumstances. And sometimes it’s a simple mistake that puts you on the hook.
Here are three imagined examples that show how a business issue can cause real problems for a business owner:
Donna was an interior designer who spent a lot of time on the road visiting her clients’ homes and shopping for furniture, rugs, etc. Donna’s Designs, her business, bought the car that she drove. But she was able to insure the vehicle for a cheaper rate under her personal auto policy. Unfortunately, when she got into an accident, her claim was denied because Donna’s Designs, not Donna, was the owner of the car, and that entity was not covered under her policy.
Juan dreamed of opening a burger place on the beach. When he established a relationship with his beef and baked goods suppliers, he had to sign a personal guarantee in order to get his first month’s supply of meat and buns. The Burger Shack brand was a hit, rapidly expanding to five locations in the area. Years later, the business fell on hard times after one negative health-inspection report made headlines in the local news. All of the Burger Shack locations closed within two months. But Juan was still on the hook for the past-due bills from the suppliers that he had forgotten he’d personally guaranteed years before.
Cathleen owned a dry cleaning business. She knew her employee Rick had some personal struggles but believed in giving second chances. One morning while he was out on deliveries, he caused a serious accident, injuring a young mother and her child. It turned out to be his third DUI. The injured woman’s insurance company sued Cathleen for punitive damages, arguing that she was negligent for not checking Rick’s driving record.
In each case, a well-intentioned business owner made an honest mistake and paid a price personally. Failing to maintain distinctions between business and personal lives is one of the most common ways business owners get into trouble.
Inviting the right professionals into your life can make all the difference. For instance, one way to put another layer between yourself and your business is to create a revocable trust and transfer ownership of personal property such as your home or vehicles into that trust, naming yourself as the trustee and beneficiary. (If you do this, similar to the first scenario above, you must be sure the named party on your insurance matches the legal owner—the trust.) A good attorney can advise you on this and on the best choices to make when setting up your business.
An accountant is another strong partner. Even if you’re a do-it-yourselfer, a knowledgeable accountant can help you set up your record-keeping and ensure that you understand your tax obligations and timetables.
It’s an equally smart decision to speak with an insurance expert to be sure your personal life is protected from your business involvements. He or she will assess your life from a risk perspective, a slightly different lens than what the other professionals may use. They will also encourage you to reevaluate your situation every few years. Because even if you haven’t made any material changes, new laws or regulations may have come into play that could affect your insurance decisions.
At Kelly Klee, we have expert agents who can help you think through your unique situation and ensure that you have the right insurance in place to protect your personal life. We can audit your current policies and make suggestions for the right types and levels of coverage to give you peace of mind going forward. To learn more, please contact a Kelly Klee Coverage Expert here or at (970) 710-3121.