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Small Business Owners

Small business owners more often than not operate their business completely unaware of the personal liability hazards and exposure to lawsuits that can force a monetary settlement, such as contracts and torts (actions and acts that result in a damages). Avoiding daily liability exposure and lawsuit risk as a small business owner requires more than just forming a limited liability company or corporation as an asset protection plan.

First Steps in Protection

A properly established, funded, maintained and operated business entity is only the first step in creating a legal barrier between business liability and your personal assets. Both corporations and LLCs have annual requirements and operational formalities that must be followed in order to preserve their limited liability protection.

Understanding Contract Liability

Unless you understand the nature of contract law, it is impossible to successfully avoid, even with proper planning, unlimited personal liability for business debts when an exception applies. Specifically exceptions in both tort and contract liability. These exceptions can be avoided and business owners can preserve guaranteed legal protection, thus separating his/her personal assets from business liabilities, through more advanced asset protection planning, or a detailed understanding of contract law authority as well pitfalls that can result from torts.

Contract Law Authority

In order to enter into a contract for a business owner, an acting agent requires express authority, which is permission either verbal or written from the principal. Verbal authority can get tricky in a legal situation, written authority is preferred. The most common source of express written authority is from corporate bylaws and resolutions (corporations), or an operating agreement and member or manager resolutions (limited liability companies).

Implied authority and apparent authority are other forms of express authority. Although neither are verbal or written, these two can still land the business owner in a legal liability situation through a binding business contract via authority under contract law – even if no actual authority exists.

Most business owners are blissfully unaware of contract law and tort claim liabilities that expose their personal assets to monetary damage claims.

Avoiding Contract Liability

In order to greatly limit liability for torts and contracts, the small business owner needs to have an understanding of agency law. An agent is a representative of the small business owner, the most common form of this is the employer/employee relationship.
Legal entities, such as corporations and LLCs are separate persons in the eyes of the law, however are inanimate and require action through agents. To preserve the liability protection afforded by your corporation or LLC, the small business owner must always act as an agent of the business, rather than personally – which includes agents of the principle, i.e. employees.

Contracts can result in unlimited personal liability if the business owner enters the contract prior to the corporate entity’s formation, or through failure to identify the principal and finally, through personally guaranteeing the business’ contract.

Careful business sense can help in avoiding contract exceptions, however a solid personal asset protection plan is the only way to completely shield your wealth from unnecessary business liability including contract exceptions.

Avoiding Tort Liability

Every small business owner should goal set to limit liability from torts in the business. Personal injury law is the best way to briefly define tort law and the best example of this is negligence, or causing damages to property or injury to a person from careless action. When a tort is committed by an individual, s/he is liable to the other party.

The individual is always liable for his or her own actions, however when acting as an agent on behalf of a business, the business will get sued as well. There are two misconceptions with tort liability on both sides; the individual usually believes that while acting as an agent on behalf of a business principal (employee conducting work tasks for the employer) s/he is not personally liable for damages, this is not true. The employer will be liable as well in the same situation.

The business, or better yet, the insurance carrier of the business will cover monetary damages, IF the insurance policy covers the specific situation, AND policy coverage is sufficient to cover all of the liability for damages – insurance coverage does not relieve an individual’s personal liability.

This situation is at its worst when the business owner (acting as an agent of the business entity) commits a tort, resulting in double liability with the individual responsibility and corporate responsibility. This is a potentially hazardous exception to a business owner’s liability limiting efforts.

Tort liability can be assigned to a business owner without proving any wrongdoing at all through what is referred to as the “master-servant” rule of law. This means that the business owner can automatically be held liable for a tort caused by an acting agent. Being a careful business owner makes little difference when it comes to defending against such claims.

Small business owners should be especially protective of their personal assets from inside and outside liability of being a principal. The only true protection comes in the form of a personal asset protection plan using the strongest laws available.