About 20 percent of new businesses fail in the first year. Around 50 percent don’t make it past the fifth year.
The small business failure rate in the United States is well documented, but these businesses fail for different reasons. One of the major reasons is some businesses don’t adequately prepare to overcome their liabilities.
Your business shouldn’t fail because it was weighed down by a liability. In many cases, you will know your liabilities when you start the business. All you need to do is build a solid protection plan.
So, how do businesses protect from liabilities?
Continue reading to learn how you can shield your business from its risks and liabilities.
Know the Liabilities Your Business Faces
A savvy entrepreneur establishes the liabilities their business faces before they start operations.
Do you know your liabilities?
Every business is unique, which means the liabilities your business faces aren’t necessarily the same set of liabilities your competitors face. To figure out your liabilities, you must audit assess every aspect of your business.
For instance, let’s say your business is a brick and mortar store. Can you identify any liability here?
From the very fact that customers walk in to buy what you sell, your business faces a big liability. What if a customer slips and falls while in your store and they sustain an injury? Did you know they can u sue your business for that?
The same goes if your business has in-house employees. An on-the-job injury can result in a lawsuit that requires you to compensate them accordingly.
If you manufacture your products, have you ever thought that a malfunction can put the user at risk? If it explodes and injures them, for instance, your business could be held liable.
Now let’s have a look at your business’s finances. Did you borrow some money when raising startup capital?
If yes, what happens if you’re unable to repay it? Will your lender come after your personal or business assets? That’s a big liability right there.
In short, there’s a liability in every aspect of your business. Knowing what they are is the first step to adequately protecting your business.
Purchase General Liability Insurance
General liability insurance is usually the first measure for business owners who’re keen on protecting their businesses. For the most part, buying this insurance policy works, especially if you’re a small business.
For about $500, you’ll get a liability insurance policy that covers a majority of your liabilities, including property damage, on-site injuries, and advertising injury claims.
However, the mistake some small business owners make is failing to embrace the fact that on its own, general liability insurance, is barely enough.
If you’re a contractor, for example, you need to realize that general liability alone might not cover employee injuries. These policies have limits, which means a couple of injuries can quickly max out the limit. What’s more, this isn’t the only thing your company is getting wrong about contractors liability coverage.
To fix this problem, start by purchasing enough general liability coverage. Don’t go for the cheapest available package. Instead, do a proper liability assessment and then purchase general liability insurance that adequately covers those risks.
Purchase Workers’ Compensation Insurance
In many states, it’s a legal requirement to purchase workers’ compensation insurance if you have more than three employees.
Although it’s the law, you’d be surprised to learn that some employers still don’t have any form of workers’ comp insurance. If you’re one of these employers, you’re not only putting your employees at risk but also your entire business. You’re also risking personal prosecution.
And if you already have workers’ comp insurance, don’t settle on the bare minimum. By forking out a couple of hundred more dollars, you’ll increase coverage by several thousands of dollars.
General liability and workers' comp insurance aren’t the only insurance policies you should buy for your business. If you have online operations, add cybersecurity insurance.
Business interruption insurance is also crucial for every business.
Make Strategic Business Decisions from the Start
You can purchase as much insurance coverage as you want, but at the end of the day, insurance isn’t really a preventive measure. It just protects your business from financial losses when a certain liability comes to fruition.
This is why it’s important to not consider insurance as the first line of defense. And for this to happen, you must make strategic business decisions from the start.
Let’s say you’re planning to set up a warehouse for your business. If you go ahead and build it in an area that’s prone to flooding, you’ll only have yourself to blame when a flood destroys it. Yes, you can purchase flood insurance and receive compensation, but there’s no doubt the damage will set back your business.
To avoid such a liability, why not build the warehouse in a location that has a low flood risk?
When starting a business, think about the potential consequences of every decision you make, in terms of liability exposure.
Know When to Hire a Small Business Lawyer
Sometimes a liability can blow into a lawsuit that threatens the existence of your business.
For instance, if multiple employees are injured on the job and your workers’ comp insurance isn’t enough to settle their compensation claims, your business will have to pay out of pocket.
But what if your business doesn’t have the funds? The employees can go to court, and the court can order that you sell your business assets to offset the claim.
In such situations, don’t hesitate to hire a business lawyer. With proper legal advice and representation, you will be in a better position to make decisions that are in the best interest of your business.
How Do Businesses Protect from Liabilities? Now You Know!
Tackling liabilities might not be the first thing in your mind when you’re planning to open a new business, but it should. Liabilities can be the downfall of your company. With this guide, your question "how do businesses protect from liabilities?" is well answered. Now it's time for you to improve your company's risk management and reduce liability.
