Liability

Liability

I’ve been doing research on liability. This is a term we throw around a lot, it has the ability to make my stomach queasy and my innards clench, but I needed more definition of what liability actually looks like in a real life situation.

Because, let’s face it. Life is risky. We’re walking around this world as a mostly liquid mass held together by a bundle of skin that isn’t exactly the strongest thing ever. I tell my kids to be careful with water balloons all the time – in many ways we’re just large water balloons zipping around in cars that go 80 mph regularly!

Life is fragile friends. We live with that knowledge every day.

So what about the phrase “liability” gives me heartburn? How do some situations make more of a difference than others?

Let’s define our terms and see if this really is a monster.

Personal Liability: “Being personally liable” means that a plaintiff who wins a court judgement against your business can satisfy it out of your personal assets, like your bank account, home, or automobile simply because of your status as an owner of the business.” (Personal Liability | Digital Media Law Project)

As a small business owner, you have choices of how you can establish yourself. I know a whole bunch of ladies who are operating as small business owners for their home education communities, as I did myself. I don’t personally know anyone who is classified as anything other than a sole proprietor but I understand that those friends, as of last week, might have an option to sign their licensing contracts as an LLC. There could be some major benefits to that!

Let me use other professional’s words to explain why your legal classification matters:

Sole Proprietorship: “A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities… ” (Sole Proprietorship | US Small Business Administration) Read: this is the riskiest way to have a business because there are no safety nets.

LLC. “One of the main purposes of an LLC is to provide liability protection for the members and managers. Unlike some other business structures, such as a sole proprietorship, an LLC structure protects the personal assets of the owners from business liability.” (What is the Purpose of an LLC? | Legal Zoom) Read: this is a safer way to hold a business because there is at least a little protection against liability.

“If you’re a sole proprietor, there is no legal divide separating your personal assets from those of your business. If you’re sued, that can spell trouble. That’s why many sole proprietors opt to incorporate as a limited liability company (LLC).” (Why LLCs Need Liability Insurance as Much as Sole Proprietors | Insureon)

So why isn’t everyone an LLC?

“LLCs require more paperwork upfront than a sole proprietorship and will add a degree of difficulty to your taxes. … {AND} your LLC can still be sued and be liable for huge sums of money, which is why it’s still smart to carry liability insurance policies such as General Liability Insurance and Errors and Omissions Insurance.” (Why LLCs Need Liability Insurance as Much as Sole Proprietors | Insureon)

Before we go into a discussion of insurances, it’s fair to see what liabilities might exist for a small business owner anyway.

What types of things have I done as an independent small business owner?

I’ve contracted tutors. (Potential areas for liability are whether those tutors are correctly classified as independent contractor or employees, whether they have ever been alone with a student in a classroom, etc.)

I’ve established relationships with churches for meeting space. (Potential areas for liability are whether the church is at risk of losing their property tax exemption for hosting a for-profit business, who is responsible if someone falls off the playground equipment, who is responsible if plaster of paris is poured down the pipes, etc.)

I’ve recruited students for a program and provided tutoring services to families. (Potential areas for liability are whether the tutors I’ve contracted are presenting the program with integrity and making parents feel like they are receiving what they paid for, whether I’ve background checked all tutors and nursery workers to ensure the safety of the students, etc.)

So I’ve established that in my own small home education business I had some distinct areas of liability.

What’s the worst case scenario? Let’s look at a few:

Misclassifying Workers. “‘Misclassifying employees as independent contractors and failing to provide W-2 forms can subject an employer to back taxes of as much as 41.5%* of the contractors’ wages, according to the IRS. And these penalties can go back for three years.’ If the IRS thinks you intentionally misclassified workers they may seek a criminal conviction with up to a year in jail and a fine as high as $500,000 for a corporation. Plus you get the label “tax evader.” The independent contractor themselves may be audited and may be forced to repay any business deductions they took during that time.” (Do you know the penalties for improperly classifying employees as Independent Contractors? | SHRM Blog)

Unintended Accidents. I live in fear that one of the kids I work with will do something ridiculous and kid-like and end up getting seriously injured. My thoughts always go to the McDonald’s “hot coffee” case. The case wasn’t actually a frivolous lawsuit – “The coffee was not just “hot,” but dangerously hot. McDonald’s corporate policy was to serve it at a temperature that could cause serious burns in seconds. Mrs. Liebeck’s injuries were far from frivolous. She was wearing sweatpants that absorbed the coffee and kept it against her skin. She suffered third-degree burns (the most serious kind) and required skin grafts on her inner thighs and elsewhere.” Only after her own medical insurance maxed out and refused to complete the treatment she needed to be able to walk, she went to McDonalds to ask them for help paying her treatment costs. How many of the families that I have served have medical insurance? I have never asked. But if something happens while at our meetings, as a sole proprietor, I could be liable for their costs.(The McDonald’s Hot Coffee Case | Consumer Attorneys of California)

This is far from an exhaustive list, but it is compelling that there’s enough here for me to consider looking into whether my family could sustain such a hit of “liability.” As I look at our own finances… a lawsuit could sink us, even if we’re found not responsible the costs and fees associated with a suit would be devastating to my family.

So… insurance would be something for me to consider.

Small Business Liability Insurance: “Every business, even if home based, need to have liability insurance. The policy provides both defense and damages if you, your employees or your products or services cause or are alleged to have caused Bodily Injury or Property Damage to a third party.” (13 Types of Insurance a Small Business Owner Should Have | Forbes)

This is separate from the policy I took out to cover the interests of the facility I was privileged to meet within. Small Business Liability Insurance would cover PERSONAL LIABILITY which is so important because I signed up as a SOLE PROPRIETOR.

I would also consider Professional Liability Insurance. “The policy provides defense and damages for failure to or improperly rendering professional services.  Your general liability policy does not provide this protection, so it is important to understand the difference. ” (13 Types of Insurance a Small Business Owner Should Have | Forbes)

So if I am running a tutoring service and something happens that prevents me from providing the service offered – maybe a freak snowstorm kept us from meeting multiple weeks, perhaps a tutor quit, who knows what might happen? – Errors & Omissions insurance would protect me from Professional Liability.

Hm… guess what? If I contract my tutors as independent contractors, they aren’t a part of my personal E&O policy. They have no professional relationship with me except to perform their contracted duties so my insurance policy wouldn’t cover them.

So I would say that the tutors I contracted as Independent Contractors should consider taking out an insurance policy to cover their actions in the classroom. I mean, who’s to blame if someone brings a peanut butter cracker into the class for snacks and the kiddo with the nut allergy smells it and goes into anaphylactic shock and has to be hospitalized for treatment? The student who was a minor? Or the adult who was overseeing the meeting time? I suppose a court would be able to decide although it will take awhile: “Civil court trials take longer and are typically set for trial a year or 18 months after being filed. Criminal trials are set sooner since the defendant has a right to a speedy trial. The process of a lawsuit takes time.” (Why Does A Lawsuit Take So Long? | Miller Law)

Finally, how can all of this affect my family? Well, business issues could affect your personal credit score. Credit scores are used as part of the evaluation process for all sorts of things from insurance rates to rental verifications.

Additionally, any claims filed against any insurance policy will follow you for years: “‘There’s a significant correlation between claims that are made and future additional likelihood of claims being made,’  says Chris Hackett, senior director of personal lines policy at the Property Casualty Insurers Association of America. You can request one free copy of your C.L.U.E. (Comprehensive Loss Underwriting Exchange) Personal Properly report, which includes all the claims you’ve filed in the past seven years. The report includes date of the loss, type of loss and the amount paid out to cover the claim. McChristian says the amount of the claim may be less important than the reason for the claim. (16 factors that affect homeowners insurance rates | Insurance.com)

No one knows what the future holds, except that we do know that the Bible tells us to expect persecution for living in a Christian way. Being IN the world but not OF the world does not release us from a responsibility to understand how the world does business.

A careful review of my previous contracts revealed that I was carrying 100% liability for all of the actions I took for my small business, even though I was doing it under direction and authority of my licensing agreement.

There is legally no calvary riding to the rescue if something goes wrong according to the contract I signed.

Having explored liability with more thoroughness, I can now make wiser decisions than I have in the past. What a gift! I’d encourage every person who is exploring their options to do the same!

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2 thoughts on “Liability”

  1. this actually happened with a friend of mine. Her kids were jumping on a trampoline at HER MOTHER’S house (kids’ grandma). The health insurance sued the grandmother’s home insurance

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