Four Alternative Ways to Limit Your Liability
When most people think about limiting legal liability, they think of the types of businesses that you can set up. There are many entity structures which can limit your personal legal liability, like Limited Liability Companies and C Corporations. However, picking a particular entity type is not the only way to protect yourself and your business.
While entity structure can protect the personal assets of owners, investors, members, or partners, the entity or enterprise itself can still be liable for any acts, errors, or omissions of its employees and agents. The good news is that there are many ways of mitigating risks and limiting your and your business’s liability other than entity structure. Below are four options to further protect you and your business.
- Legal Consultation and Strategic Planning
The best thing to do before getting into business, whether you’re providing a service or selling goods, is to invest in a paid consultation with an attorney to get legal advice about where your potential liability may be. During that consultation, the attorney, if skilled in business, will be able to talk to you about the different potential areas in which you could experience liability and present you with your various options to mitigate those risks and liabilities.
A business lawyer can provide assistance by:
- Choosing your entity type;
- Crafting contracts;
- Suggesting for insurance about which you should seek information;
- Drafting disclaimers and notices;
- Seeking out intellectual property protections; and
- Trademark and business name selection support.
Every business is different and has unique goals and challenges, so taking the time to consult with an attorney is invaluable. While most law firms offer free consultations, it is important to note that attorneys typically do not give out legal advice during those free consultations. Rather they use that time to learn about you and your situation so that they can suggest the best course of action. Budgeting money for a paid consultation now to figure out what your risks are can save you a lot of time and money later. It is always better to get ahead of your liabilities and risks so that you can optimally manage them now versus confronting them when they rise to the level of a lawsuit or other claim or action.
- Contracts
One of the main purposes of a contract is to create rules for a transaction or business relationship between parties. Each party has a lot of leeway in creating rules and setting standards to limit its own liability to the extent the party’s counsel can negotiate them.
For example, in a purchase agreement, the seller can write that the purchaser is responsible for arranging for delivery of the goods being sold. This not only saves the seller money but reduces the seller’s liability which would otherwise be associated with the delivery of goods since the risk is shifted to the purchaser.
There are specific tools in contracts and types of contracts which can also be used to limit your business’s liability, including:
- Releases: Releases are the most common tool used in law to remove or mitigate legal liability. A release is a legal agreement or provision in an agreement where a party releases another party from liability. Think of these as agreements not to sue, or a hall pass for whatever the release covers. It is important for releases to be specific about what exactly they cover. If the release is not specific or is too general, it is possible that a court may choose not to enforce it because your business cannot generically be released from liability for anything and everything under the sun by someone.
- For example, are you released from liability relating to the sale of a TV with serial number 19475949XSJ4948 or are you released from liability relating to someone falling while in the store viewing the TV?
- Liquidated Damages: In contract law, everyone gets compensatory damages for breach of contract, meaning you’re compensated for what you should have gotten under the agreement and/or for the harm and damages you actually suffered. This is as opposed to punitive damages which are basically a punishment for the person paying them – they include damages for pain and suffering and are granted most commonly in tort cases where someone personally suffered an injury. However, there is one way to “mitigate” or at least set a standard for damages in advance: including a provision for liquidated damages. These are provisions which define the damages to which either party is entitled because the particular loss either party would suffer under the contract would be difficult to define otherwise. In order for these provisions to be enforceable, they must be crafted carefully and consistently with the governing state law to the contract.
- For example, if you’re hiring a construction company to build your new home, you may include liquidated damages at a certain rate for each day that construction is delayed past the agreed upon deadline for performance because you are suffering harm from the delay, but it is not so easy to quantify that harm objectively.
- Disclaimers: Disclaimers can be a part of contracts, printed on packaging of goods, given orally, or printed on signs. Disclaimers in a contract are a good way to say “I am not responsible for x, y, or z.” These always need to be clear and conspicuous, meaning you need to make them very obvious to the person to whom you’re making a disclaimer. The most common disclaimer is “as is” used in selling some good. Under the Uniform Commercial Code, “as is” or “with all faults” are special, legally operative words which exclude all implied warranties. While you can certainly make other disclaimers or use other terms, those are a few specific terms that are legally recognized to disclaim implied warranties. When entering into a contract or designing a label to print on a product you sell, contact an attorney to talk about what disclaimers you can reasonably make.
- Setting Clear Expectations with Your Clients or Customers
One of the best ways to limit your liability is to manage your clients’ or customers’ expectations and be clear about what they are going to get out of doing business with you. While you can set expectations through contracts, you can also set expectations by communicating; this can include speaking with your client, sending emails or texts, and through the use of signage.
If you sell goods, then tell your clients exactly what they get and make sure they understand what they won’t get from you. For example, if you sell a GPS monitoring service but no equipment or devices, not only should that be in your contract, but you should also tell your client clearly and conspicuously that they do not get the physical equipment or devices with the service.
Another example is, if you sell an electronic device which requires batteries or a charger which are not included, then make that very clear to your customers– maybe even write it on the device’s packaging.
It is just as important to tell people what they get from your business, whether that is goods or services, as it is to tell them what your business won’t be giving them.
- Insurance
While insurance doesn’t protect you from liability, it does help individuals and entities protect themselves from having to personally pay judgements or settlements to claimants. There are many kinds of insurance for both businesses and individuals. Businesses can obtain many different types of insurance including:
- General liability insurance;
- Premises liability insurance;
- Umbrella insurance;
- Errors & omissions insurance;
- Worker’s compensation insurance;
- Directors’ and officers’ liability insurance; and
- Professional liability insurance.
If an individual is personally performing services, then that individual can seek some form of liability insurance which would cover acts, errors, and omissions as well as cover general business liability to mitigate financial responsibility for liabilities. If an individual is performing a professional service, then that individual should seek professional liability insurance specific to his or her professional license and service industry.
Please contact a licensed insurance agent, broker, brokerage, or company to learn about all of your liability insurance options – while this blog post covers a few types of insurance, please be advised that Suri Law is not an insurance brokerage or company; further Suri Law does not employ nor is it in any way associated with any licensed insurance professionals.
If you’re interested in discussing your legal options to manage your liability, please feel free to contact Suri Law for a consultation. Call our team today at (212) 444-8244.
Disclaimer: Please be advised that nothing in this publication constitutes legal advice and that it is purely for educational purposes. It provides general information about a legal topic but does not provide any specific legal advice nor does any individual’s reading of, commenting on, or reliance on this publication create an attorney-client relationship.
This publication should not be used as a substitute for legal counsel or advice from a licensed attorney who practices in the area and jurisdiction in which you seek advice or for legal research or consultation on specific matters.
Additionally, please note that the law is constantly changing, so, while this publication is accurate as of the date of publication or update, the law may change and portions of it may be rendered moot or inaccurate at any time thereafter. Please be further advised that Suri Law PLLC does not provide tax law or accounting advice. Please seek out an accountant or tax lawyer for specific advice on any tax-related matters.