AMONG ALL OF the truisms bandied about by small-business advisors and consultants, two words to the wise invariably ring true: Accidents happen.
A misplaced cellphone goes through the laundry at a dry cleaner’s. A waiter serves a shard of glass hidden within a customer’s house salad. A doctor inadvertently prescribes the wrong medication. While such events are unpredictable and difficult to plan for, they’re also a fact of doing business.
Entrepreneurs must practice the utmost care when dealing with customers. In addition to installing strict safety procedures and quality-control measures to prevent similar mishaps, they should insure that customers can receive proper compensation if such events occur. But also, business owners need to take steps to limit their own liability.
To protect your assets and provide remedies when the inevitable happens, here are a few considerations before opening your doors.
Name Your Terms
A chief way to protect yourself is to spell out terms and conditions when you sell products or services, says Peter Stanwyck, a small-business attorney in Oakland, Calif. “If you have a no-return policy then you’d better have that up in your store,” he says. If you do business via the web, make sure to list terms and conditions in a special section on your site, he says. Other firms choose to enclose this information on vendor purchase orders or on the backs of receipts. This written account of your business’s wishes is essentially an opportunity to let customers know the terms in which you will do business. A customer can then either accept the terms — that is, continue to make purchases — or not. “An agreement, if done correctly, can control the amount and type of liability you can have to a customer,” says Stanwyck.
As a caveat, says Monte Engler, head of the commercial-business practice at the law firm Phillips Nizer in New York, “you’ll probably want to steer clear of anything out of the ordinary” within the terms and conditions clause. Many small-business owners shy away from restriction-laden agreements because they don’t want to get painted into a corner. One way around this is to check out competitors’ terms and conditions clauses and make sure you’re on par with them.
To limit the cost and time investment involved in settling disputes, business owners are increasingly requiring customers to agree to mandatory mediation or arbitration rather than litigation as a condition for using their services. Since these alternative dispute resolution methods don’t necessarily require attorneys they can be cheaper. And unlike litigation, which can take years to resolve, mediation or arbitration usually lasts for days or weeks. Additionally, these proceedings are out-of-court by nature, so they’re ideal for business owners who want to keep their legal involvement out of the public eye.
Alternative dispute resolution agreements, which have long been a staple in business-to-business relationships, have only recently started gaining traction among small businesses that sell products directly to consumers. One reason for the trend is that such agreements can establish “venue” — that is, where legal proceedings take place. Web retailers, for example, often do business in numerous states, which means if they’re not careful they can also get sued in numerous states, says Debra J. Guzov, managing partner of Guzov Ofsink in New York.
For example, notes Guzov, without an agreement, there’s nothing to stop a customer in Hawaii from filing suit there even if you live in Maine and your business was incorporated in Delaware. “We represent clients getting sued in Nevada from China,” says Guzov. The mere cost of going back and forth from one place to another over the course of a single court case can be enough to bankrupt a small venture, she adds.
Keep in mind that decisions reached via arbitration are legally binding and not usually subject to appeal whereas mediation is generally nonbinding. For more information, check the American Arbitration Association’s site or the Better Business Bureau’s dispute resolution arm.
Pick a Legal Entity
Engler of Phillips Nizer added that a business owner can protect personal assets simply by incorporating or becoming a limited liability company. “The basic purpose of entities such as a corporation and a LLC or a single-member LLC is to insulate business people from most if not all [personal] liabilities,” he says. Since such an entity is considered separate under state law, a business owner’s personal assets such as a home and investments are generally protected from business-related liabilities.
At the same time, “incorporating is not a panacea,” Engler says. It won’t protect your personal assets from certain liabilities, such as those caused by your own professional malpractice or negligence. Nor will incorporating or forming an LLC protect you from liabilities resulting from so-called “tortious” acts, which are legal misdeeds such as a breach of contract.
Keep in mind that some states, including New York and California, require businesses that are set up as corporations or LLCs to seek outside counsel if they wind up in court. Only business owners who are licensed attorneys in the state where proceedings are held can represent themselves.
To protect your assets in the event someone sustains bodily injury or property damage as a result of your own negligence, consider getting general liability insurance. A classic example of when this type of liability insurance would be helpful, suggests Jeff Olmstead, assistant vice president of insurance at the Hartford Financial Services Group in Hartford, Conn., is a customer shopping at a local grocery store who falls and gets hurt. This type of insurance, which could cover the damages resulting from that person’s injuries, is generally included in a business owner’s policy, or (BOP).
There’s also professional liability insurance, which covers injury resulting from errors and omissions that arise out of the service you provide. Though policies may be pricey, it’s a good option for professionals who give advice or make recommendations to others. For instance, says Olmstead, “if you don’t perform the services you were supposed to or if you perform them incorrectly, this insurance will kick in.” Doctors, lawyers and even hairdressers, he says, should consider this type of policy, which may or may not be included in your business owner’s policy.
(“Starting Up,” a weekly column written by Diana Ransom for smSmallBiz.com, follows entrepreneurs through the early stages of launching a business. Write to her at firstname.lastname@example.org .)
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