liability issues

[Guest guest]

Hi Kathy...

Assuming you're in the US, there is a company called " RLI " that insures

small scale toiletry/cosmetics manufacturers...they'd probably be able to

assist you. Sorry,I don't recall their URL - maybe RLIcorp.com? I'm sure

there's something in the archives.

As to liability issues in general - you're right - as a sole proprietorship,

you do need to protect yourself. But don't kid yourself into thinking that

being incorporated is some sort of panacea against personal loss. I know

that's the general thinking, and in theory it's correct, but in reality, it

doesn't wash...here's why:

First, when dealing with small corporations, the vast majorities of

suppliers, etc., will require personal guarantees before granting credit.

So, while this might protect you against losses due to a lawsuit, if your

firm was forced into bankruptcy because of legal action/costs, you'd still

be personally liable for the claims of your creditors.

Second, and this is more personally relevant to you, there has been an

increase in the perception of director responsibility in the eyes of the

courts, both in Canada and the US. Years ago it was almost unheard of for a

director of a corporation to be held personally liable for the injurious or

negligent actions of the corporation, but nowadays it is becoming more

common. As the sole, or at least a major shareholder of an incorporated

company, you would undoubtably be one (if not the only) of the directors of

the corporation, and thus, might still be held liable for the actions of the

company. In fact, as a small, closely held company, where you, a director,

are also heavily involved in the operations of the firm, it's almost

guaranteed that you would be held personally liable in a lawsuit.

So, in other words, the protection offered to a small concern by

incorporation where liability/negligence cases are concerned is virtually

nil.

Incorporation also has its own share of hassles aside from this. There's

regulatory filing, the requirement to follow GAAP (generally accepted

accounting principles) - which probably means bringing in an accountant,

separate business and personal tax returns, and so on and so on. That

doesn't even include the costs of incorporation.

To touch briefly on partnerships - they are just as risky, if not more so.

In a partnership, you are " jointly and severally liable " for any actions of

either partner. In other words, if your partner does something dumb that

injures a customer, even if they take full responsibility, the injured

person can come after YOU and your assets. There is virtually no protection

of personal assets in a partnership. A " limited partnership " does exist,

but generally that's used either in joint business ventures, or where a

" silent partner " exists who is completely uninvolved in the business

arrangements. A limited partner is liable only for the amount specified in

the partnership contract.

Again, partnerships involve significantly more legal and accounting fees

than a sole proprietorship does.

My own opinion is that while you are relying primarily on your own efforts

and investments (i.e. no venture capital) you remain a sole proprietorship

and get good insurance coverage. It's what I'd do.

BTW - I am an accountant, but I am not licenced to engage in public

practice. Therefore this is not to be construed as offering business advice

or formal opinion.

(I gotta put that part in - part of the rules I work under!)

Hope that helps

Jules in Vancouver

> Date: Fri, 28 Dec 2001 08:52:37 -0700

>

>Subject: liability insurance

>

>Hello all,

>

>I'm hoping someone on this list can help me. I'm interested in finding out

>about product liability insurance; more specifically, the names and numbers

>of any companies or agents who can help me get product liability insurance.

>

>I've been in business for just over a year now. I own my own home. Right

>now my business operates as a sole proprietorship. I'm afraid someone may

>misuse one of my products and take a lawsuit out on me. I sell

>aromatherapy products.

>

>I'm also interested in where I can find more info on labeling laws, to be

>sure I'm in compliance there.

>

>Has anyone incorporated, or is anyone operating under a limited

>partnership, or any such thing? I would sincerely appreciate hearing any

>pros/cons about any of this, too.

>

>I look forward to any responses you all may have to offer. I love my

>business, but don't want to lose my personal assets should something

>happen.

>

>Thanks in advance,

>

>Kathy O.

>

>

>