Starting a Business

Guide to Limiting Liability for Business Owners

By David van Moorsel

Disclaimer: This guide to limiting liability for business owners does not contain legal advice. The availability of different techniques for limiting legal risk will depend on the unique circumstances of your business. If you want to discuss legal questions related to your specific business, consider booking a consultation with an Alberta business lawyer.

Introduction

Starting a business can be exciting, but it also comes with its share of challenges. One of these challenges is limiting liability for business owners.

Whether you’re in the business of selling lemonade, explosives, or SEO services, operating any business will always involve risk. If it didn’t, everyone would start a business.

Although it’s impossible to completely eliminate ALL risks of owning a business, there are several things that business owners can do to significantly reduce their risk of personal liability.

This guide will help you as a small business owner protect your business and personal assets. We’ll start by discussing what liability is, and common ways that it arises in business. Then we’ll provide 10 practical ways that business owners can reduce their risk. Let’s dive in.

Understanding Liability In Layman’s Terms

What is Liability?

Liability put simply, is the responsibilities and obligations you and your business have towards others. This could be towards customers, employees, other businesses, or even the government.

Imagine you own a store, and a customer slips on a wet floor. You could be held responsible or “liable” for their injury, even if you didn’t spill the water yourself.

Examples of Typical Liabilities in Businesses

Common examples of liability that can arise in business include:

  • Product Liability: If a product you sell harms a consumer due to a defect or failure to warn about potential risks.
  • Contract Liability: If you enter into a contract and fail to comply with the agreed terms.
  • Tax Obligations: Depending on how the business is structured and the role you play, you may be personally responsible for making sure taxes are paid.
  • Employee Actions: The actions of your employees can cause liabilities for your business through “vicarious liability”.
  • Debt Obligations: If the business fails to repay debt on time, creditors will likely pursue legal action.
  • Intellectual Property Issues: Using someone else’s intellectual property without permission.
  • Occupiers’ Liability: If someone is injured on your business property.

10 Practical Steps to Limit Liability for Business Owners

1. Choosing the Right Business Structure

In Alberta, choosing the right business structure is vital to limiting liability:

  • Sole Proprietorship: You as the owner are the business. There’s no separation, meaning you can be personally liable for everything related to the business.
  • Partnership: Two or more individuals share responsibility, profits, and liabilities.
  • Corporation: Registering a business as a corporation separates your personal assets from your business assets. The corporation takes on the risk, not the individual owners.

Incorporation acts like a quarantine for potential business liability. It can help prevent the spread of business liability to your personal finances.

2. Obtaining Business Insurance

The right kind of insurance can greatly reduce business liability risk:

  • General Liability Insurance: Covers accidents or injuries on your premises.
  • Professional Liability Insurance: Covers claims related to mistakes or negligence.
  • Property Insurance: Covers damage to business property.
  • Workers’ Compensation Insurance: Mandatory in Alberta for employees injured on the job.
  • Cyber Liability Insurance: Covers digital data breaches or losses.
  • Director and Officer Liability Insurance: Protection from personal liability for directors and officers.

3. Preparing Proper Contracts and Agreements

  • Get it in Writing: Always insist on written contracts.
  • Use Clear Language: Avoid legal jargon. Use plain, simple language.
  • Specify the Obligations: Clearly outline what each party is expected to do and by when.
  • Include Termination Clauses: Define what constitutes a breach and how the agreement can be terminated.
  • Use Full Legal Names: If operating through a corporation, sign contracts as an agent for the corporation, not as an individual.
  • Limit Your Obligations: Use liability waivers, limitations of liability, and indemnity clauses.

We strongly recommend getting legal advice BEFORE you sign important contracts.

4. Implementing Appropriate Employment Practices

  • Insist on Employment Contracts: Have employees sign written contracts BEFORE they start working.
  • Create Employee Handbooks: Outline company policies and expectations.
  • Implement Regular Training: Ensure ongoing training on workplace safety and harassment prevention.
  • Keep it Legal: Ensure compliance with employment laws when hiring and firing.

5. Avoiding Personal Guarantees

If you’re operating as a corporation, you may be asked to personally guarantee obligations. While banks might require personal guarantees for loans, they are almost always negotiable in other contexts. If you can avoid providing a personal guarantee, you should.

6. Following Regulations and Complying with Rules

  • Understand Local Regulations: Research rules and regulations for your industry.
  • Implement Compliance Strategies: Create systems for continuous compliance.
  • Appoint a Compliance Leader: Make sure someone is responsible for compliance.
  • Seek Professional Assistance: Consulting experts can help ensure compliance.

7. Being Aware of Director and Officer Liabilities

Operating through a corporation provides significant protection, however, directors and officers can still face personal liability in certain situations, including tax obligations and environmental liabilities.

8. Implementing Health and Safety Practices

  • Put Standards in Writing: Create standardized policies and procedures.
  • Maintain Records: Maintain detailed records of key decisions.
  • Comply with Health and Safety Rules: Understand and comply with regulations.
  • Review Frequently: Audit practices regularly.

If incidents occur, thorough documentation can help prove you acted responsibly.

9. Maintaining Your Corporation

If you operate through a corporation, it must be maintained to remain active. This means maintaining corporate records, ensuring changes are recorded with the government, and filing corporate annual returns.

Failure to maintain your corporation could lead to a loss of legal protections and penalties. It may also result in your corporation being struck from the register.

10. Working With a Lawyer

Getting input from a lawyer upfront can help prevent headaches down the road. Common problems caused by failing to get legal advice include:

  • Using the wrong structure
  • Unintentionally restricting the type of business the corporation could operate
  • Appointing the wrong individuals as directors and officers
  • Failing to properly vet the chosen name
  • Misunderstanding maintenance requirements
  • Failing to properly document ownership and decision-making

In our experience, successful business owners spend money to save time. Unsuccessful business owners spend time to save money.

Conclusion

In this guide, we’ve explored the various aspects of business-related liability, from understanding its basics to choosing the right business structure and taking practical steps to limit potential risks.

Remember, every business is unique, and a one-size-fits-all approach doesn’t apply. With proper care, due diligence, and support, business risk can be significantly reduced. Take proactive steps to address risks before they become problems.

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