I had the oppurtonity to speak at the Oregon Hearing Society’s fall education seminar.  I spoke on the basics of limiting risk in a small business.  I’ve posted the outline I used for the seminar below.

The Basics of limiting liability in Business

Kevin Spence

Types of business entities

1. Using a Business Entity

   1. The formation of a business entity creates a distinct “legal person”from the business owners.

   2. A business entity separates the assets and liabilities of the business from those of the business owners

   3. The separation is not complete. Businesses that provide professional services are still personally liable for negligence.

2. Formation of business entities

   1. To form a LLC or a corporation you must file the minimum documents with the Oregon secretary of state

   2. These documents are either the articles of incorporation or the articles of organization

      1. You can file online at www.filinginoregon.com

   3. Drafting bylaws or operating agreement

   4. Transference of assets to the new limited liability entity, issuing stock, etc.

3. Benefits of Limiting Liability

   1. The major disadvantage of a sole proprietorship is that the business owner is personally liable for all debts and liabilities of the business.

   2. The formation of a LLC or other limited liability entity protects the owners from most of the liabilities and debts from the business.

   3. In Oregon, the costs of forming a limited liability entity are minimal and can be completed online.

   4. The IRS considers a single member LLC a “disregarded entity” for tax purposes. That is, a sole proprietor’s taxes will be almost exactly the same when the business is conducted as a single member LLC.

1. Maintaining a business entity

   1. Certain formalities must be followed in order to maintain the business entity as distinct.

   2. Minimum filing requirements with the Oregon Secretary of State

      1. Initial Filings

      2. Annual reports

      3. Maintaining a registered agent

   3. Separate banking accounts from business owners

   4. Corporate minutes and records

   5. Employment records

2. Limits on Limited Liability

   Certain exceptions exists to the protections provided by a LLC or Corporation.

   1. A member may be liable for the debts and liabilities of the company if the member/shareholder waived their right

      1. Personal guaranties on lines of credit

      2. Personal guaranties on lease agreements

      3. Waivers made in the operating agreement or the bylaws of a company

   2. Violating or exceeding statutory withholdings

      1. Tax withholding issues

      2. Incorrectly garnishing wages

   3. Torts committed by the owner during the course of business

   4. Piercing the corporate veil

      1. The idea that the business is effectively the alter ego of the business owner

      2. How to prevent “Piercing the corporate veil”.

         1. Make sure your business is adequately capitalized

         2. Observe business formalities

            1. Separate banking accounts for the business and the owners

            2. Maintaining business records

            3. Maintaining employee records

         3. Don’t use your business to commit fraud.

3. Using insurance to limit risk

   Specific types of insurance policies can protect businesses and business owners from certain types of risk

   1. General Liability insurance

      1. Typically, the generally liability insurer agrees to pay on behalf of the insured business those sums that the business becomes legally obligated to pay as damages because of bodily injury, property damage, personal injury

   2. Specific Types of insurance

      1. Malpractice

      2. Errors and commissions

   3. Fire and Casualty

   4. Disability insurance

      1. The primary source of income for most small business owners is their business. Because of this, the owner should consider purchasing disability insurance in order to replace the income while the owner is unable to operate the business

   5. Life Insurance

      1. Life insurance should be considered if the business owner has dependents

      2. Provides cash to pay off debts of the business if a sole proprietor or if the owner personally guaranteed the debts. Early stage businesses generally require personal guarantees on most debts so a business owner may need the life insurance when they are younger rather than older.

      3. Can provide cash to operate the business until it can be sold.

4. Using contracts to limit risk

   The requirements on what constitutes an adequate disclaimer need to be considered when the contracts are drafted. Types of contractual limitations:

   1. Exculpatory clauses

   2. Disclaimers

   3. Limitations on liability

   4. Limitations on remedies

5. Limiting Employment Liability

   1. Listen to Peter Stutheit later this morning