Michelle Bomberger is CEO and Managing Attorney at Equinox Business Law Group. Today she shares her expertise on effectively protecting your business from risk with three key tools for mitigating damage.
At Stride, we invited Michelle to join us on our last Virtual Office Hours because she has some great legal perspective on mitigating business risk. We also know that when companies get the right risk mitigation steps in place that our team of accounting, finance and HR experts can help make sure that these structures are well maintained cost effectively. For example, we can make sure that funds are flowing correctly so as not to pierce the corporate veil. To connect with the team at Stride, contact us here . Get in touch with Michelle and Equinox here.
Clients often ask me how protected their personal assets are from liabilities of their businesses and are specifically concerned as to whether the corporate form protects them. The short answer is, “Yes, it does.” However, to fully address risk, we should look at a broader set of tools for risk protection.
A company has three key tools to utilize and mitigate risk: contracts, insurance, and business structure.
I see them as cascading from narrow to broad in protective coverage as follows:
Contracts
Contracts provide you with the narrowest level of protection. They outline the terms and conditions of a business relationship, including goods and services being provided, the payment terms, termination provisions, and dispute resolution procedures.
The objective a contract is to shield a particular business relationship from other aspects of the business. If the relationship falters, the contract provides the ground rules, such as limitations on liability, indemnity, and dispute resolution procedures, for dealing with issues. Although litigation and arbitration are expensive, they provide a baseline framework for conflict resolution between parties.
Each relationship is unique and the right terms for your protection should change to reflect the specifics of that relationship.
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Insurance
Insurance provides the next tier of protection when contracts don’t exist or the contract doesn’t address the issue at hand.
We’ll use a premises lease as an example. If damage occurs, that’s clearly the business’ responsibility under the lease and not covered by the terms of the lease. The business will then leverage its insurance to cover the costs. Similarly, a company may have an employment agreement with its employee, but the employee’s claim against the company for a workplace injury or harassment wouldn’t be covered under the agreement.
Insurance is a way to mitigate risk and address claims. In business planning, you should understand your insurance options for your business and what policies you need in place to reduce risks that may not be covered under a contract.
Entity
At the highest level, an LLC or corporation provides liability protection for business owners.
If the business has a costly claim or damage it can’t pay and lacks insurance coverage, the business can choose to shut its doors. The owners of the business won’t be held liable for the debts of the company unless the owners have:
- Proactively accepted personal responsibility under a personal guarantee
- Personal responsibility under the law (i.e. for unpaid taxes and wages)
- Failed to maintain separation between the company and the individuals
Failure to respect “corporate formalities” of the business can create personal liability for owners where a creditor may “pierce the corporate veil”. This can be avoided by separating personal and business matters or maintaining corporate minutes and governance requirements. Generally, however, where a business is treated as a separate structure and business owners are acting responsibly as fiduciaries of the business, the entity will provide desired protection from liability.
When planning for business growth or any new business relationship, think about what could go wrong in the relationship and which of these tools will be most effective in offering the protection you need to mitigate the risks.
