Throughout the lifespan of a business, business owners have to make millions of decisions about how their businesses will be run. In some instances, making the wrong decision can expose the business owner to unnecessary liability that can be devastating to the business, and, in some instances, to the owner’s personal assets. It may be impossible for a business owner to completely insulate him or herself from liability, especially before the business accumulates significant assets of its own. Banks, landlords, and other vendors may require small business owners to personally guarantee any contracts they have with the small business to ensure they are protected in the event the small business defaults on its obligations. However, there are ways that business owners can protect themselves. While not a comprehensive list of every potential risk a business owner might face, this article summarizes the most common pitfalls.
Making the right choices to protect yourself and your business starts at the beginning, when the business is formed. Most business owners are aware that they should be running their business through an entity (usually a limited liability company or a corporation) in order to keep their business’s liabilities separate from their personal assets. If they do not do so, they may be personally responsible for their business’s liabilities. It is important to note that if two or more individuals decide to co-own a business and share the business’s profits, the business may be considered a partnership under Maryland law. If so, all partners in the business will be personally liable for the partnership’s debts and obligations. If you decide to form a business with someone, seek out an attorney who has experience drafting documents for multi-member entities to avoid this situation. Once your entity is created, it is important to draft organizational documents that provide for your protection. You should ensure that your business’s operating agreement (if you have a limited liability company) or articles of incorporation and bylaws (if you have a corporation) are properly drafted in a way that limits your liability and provides for your protection.
It is not enough to simply create an entity. An entity that is forfeited by the state does not provide its owners with any liability protection. It is extremely common for an entity to lose its good standing with the state because it has failed to file its annual returns and pay its annual property taxes. If the entity does not correct this mistake and restore its good standing, it may be forfeited by the state government. Once an entity is forfeited by the state, any person conducting business in the entity’s name will be personally liable for the debts incurred during that time. It is also important to treat the entity’s existence as something separate from its owners. Entities should have their own bank accounts and the business owners should not comingle their funds with that of the business. Especially for corporations it is also important to ensure that the requisite formalities (including annual meetings, properly electing officers and directors, and keeping corporate minutes) are taken. Contracts should always be signed in the name of the entity rather than the individual signing the contract to avoid any doubt as to who is liable for obligations under the contract.
Once the entity is formed, it is important that you have adequate insurance to protect your business and to comply with industry standards, as well as state laws and regulations. Exactly what kind of insurance is required depends on your business and its formation. Small businesses should consider getting general liability insurance, personal property insurance, commercial auto insurance, workers’ compensation insurance, and, in some cases, professional liability insurance, products liability insurance, data security insurance, and employer practices liability insurance. It is important to note that your existing homeowners or renter’s insurance policies will not cover you for liabilities incurred in the course of your business. Depending on the size of your business and your potential liability, you can contact your insurance agent to get a rider on your existing policy. In other instances, it may make more sense to get a comprehensive business owners policy, which is more comprehensive and can include different kinds of insurance under one policy.
As your business grows, it is important to keep up to date with the changing legal landscape. Certain court decisions and other changes in law can impact the best way to organize your business. This is especially important with respect to employment law. Many employment laws only apply to business of a certain size or have different requirements depending on the size of the business. Your employee handbooks and policies and procedures should all be reviewed by an attorney on a periodic basis to ensure you maintain compliance with changing laws and are following best practices when it comes to employment issues. For example, an attorney can review your sick leave policy and ensure that you are complying with all of the requirements under the new Paid Sick Leave Act. It is also important to ensure that your employees are properly categorized with respect to their status under the Fair Labor Standards Act and with respect to their status as employees or independent contractors. Improperly classifying employees can lead to, among other things, thousands of dollars in back pay, unpaid overtime, or benefits owed to those employees, and thousands of dollars in unpaid premiums with workers’ compensation insurance providers.
An experienced attorney can review the health of your business, including its entity status, organizational documents, contracts with vendors, handbooks and policies and procedures, and employee contracts. To the extent that any issues are discovered, the attorney will be able to help you rectify those issues and ensure you are protected going forward.
Diva Bole is an associate in PK Law’s Corporate and Real Estate Group. She focuses her practice area on business formation, mergers and acquisitions, joint ventures, commercial lending, financing and leasing, complex contracts, and corporate restructuring. Diva can be reached at 410-938-2645 or firstname.lastname@example.org.