Everyone knows that business owners should form a limited liability company or a corporation. But just having a company isn’t enough to protect you from your business’s liabilities.
You’re responsible for your own actions when you harm someone else, even when you’re working for your corporation or LLC. So if you harm someone, they can sue you as an individual and go after your personal assets. Your business might still be liable under a concept known as vicarious liability, but you’ll be liable, also.
Here’s the logic:
- Because corporations and LLCs aren’t living beings, they must act through individuals, who are their agents.
- When you work for your company, you’re acting as the company’s agent.
- Agents usually aren’t liable for liabilities that arise when they’re working for their company.
- But agents are liable for harm they personally cause to others, even when they’re working for their company.
- And the company is also liable for the harm their agents cause when they’re working for their company.
Let’s consider an example: While driving to a sales appointment for a company you own, you accidentally run a stop sign and cause a minor accident. Who can the driver of the other car sue for damage to their car? They can sue your company under vicarious liability, because you were acting as the company’s agent when you caused the accident. But they can also sue you, because you were the one who ran the stop sign.
Here’s another example: You’re working as an accountant for an accounting firm you own, and you negligently forget to file a tax form, causing your client to incur substantial penalties and interest. You could be sued as an individual because your own negligence caused the harm to your client. Your accounting firm could also be sued under vicarious liability because you were acting as an agent of the firm when you caused the harm.
As you can see, your personal assets could be at risk even when you’ve prudently set up a corporation or LLC for your business and done everything else right.
So what can you do to protect yourself? The first thing you can do is to be careful. Your corporation won’t save you from liability arising from your careless actions. But unfortunate things happen every now and then, so it’s prudent to be vigilant.
But just as importantly, you should make sure you have appropriate insurance for the risks that are involved in your business. And because both your business and you–as an individual–could be liable for harm caused to others while you work in your business, you should be sure that you have insurance that covers both your company and yourself.
What risks you should insure against depends on the nature of your business and what you personally do for your business. Here’s a great post about the various types of business insurance you might want to consider. You should also consider an umbrella policy for your personal insurance coverage to ensure that the policy limits are adequate to cover whatever liability you might be exposed to.