Starting a Very Small Business - Part 3 - Liability and Insurance Issues

As my sister and I talked about her business, she expressed concern about whether she should worry about liability. Like many people, she wasn't really sure what kind of liability she was talking about. There are several types of business liability

• Malpractice Liability
  Most professionals must be concerned with having malpractice insurance. These days, not just doctors and dentists, but all kinds of professionals, including CPA's and attorneys, must purchase insurance against the possibility that someone might sue them if they are injured (physically, emotionally, or financially)by the professional in the course of his or her work. This type of liability doesn't really apply to retail businesses.
  
• Property, Casualty, and General Liability
  Then there's the liability that all businesses face, against the possibility that someone might sue them for something that happens at the business - injury, for example. This type of general business insurance includes coverage for damage from fire and natural disasters and business interruption coverage to pay bills while the business is not able to operate. The businesses here in Iowa who didn't have this coverage had problems during the floods in June. No matter how small your business, you should consider buying business insurance. For my sister, this would not include liability, since she has determined that the antique mall has coverage. But she certainly should cover her inventory in case it is destroyed or damaged.
  
• Liability for Debts
  Finally, there is debt liability. A business owner may be personally liable to pay the debts of the business. Even if you incorporate, you may still have personal liability if the bank or lender has required a personal guarantee. This liability is the one people use as justification for incorporating the business as a c-corporation or s-corporation. With a corporation (assuming you haven't personally guaranteed anything), you are not liable for the debts of the business, since it is a separate entity.
  

  For a very small business that does not have professional liability (malpractice) issues, buying general business property, casualty, liability insurance is one of the first things you should do. As a matter of fact, many landlords require it, so they aren't held liable if something happens to your equipment, supplies, and inventory in their building. For protection against being required to pay the debts of your business, set up as a corporation or Limited Liability Company (LLC).

  Tomorrow, the paperwork needed for startup....