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Business failure is unfortunately common, and that’s because many don’t protect their businesses or personal assets when things happen. You don’t want to underestimate any possible wrenches thrown in the mix that may be out of your control.

One of the main reasons people form LLCs is to protect their assets from business liability. If the business loses a lawsuit, or cannot repay a debt, assets like your car and home will be protected.

Personal Liability

What is Personal Liability?

Liability refers to a person or business’s legal responsibility to correct some wrong where they are at fault. If you cause a car accident, you’re probably liable and you (or hopefully your insurance) will have to pay for the damages. However, if a person gets hurt in your place of business, you want to make sure your assets won’t be seized to satisfy liabilities.

Taking several steps could help avoid personal liability, and they all come down to good business practices.

Here’s How to Avoid Personal Liability

Corporate Formalities

When you form a business entity, you need to familiarize yourself with the specific corporate formalities your entity needs to follow. Playing by the rules will keep you eligible to claim protection.

Louisiana LLCs need to file an annual report. Corporations must have annual shareholders and directors meetings with corporate minutes being tracked.

Signing documents on behalf of your company is important to separate liability. Indicate below all signatures you are signing on behalf of the company. Learn more about signing contracts and follow the best business practices behind them.

Avoid Personal Guarantees

Many small business owners face the issue of making a personal guarantee for a loan, lease, or other business opportunities. Failing to meet those personal guarantees could lead to lost opportunities. Refrain from making personal guarantees completely if possible because it could lead you to personal liability.

Paying Taxes

Everyone knows you should stay on top of your taxes to avoid the outcome of when they go unpaid. Some taxes could cause personal liability if left unpaid. Business taxes that an individual can end up personally responsible for:

  • Payroll Taxes
  • Withholding Taxes
  • Sales Taxes

It does not automatically result to this extent when taxes fall past due. Payment plans, liens, and garnished business revenue will be options the IRS would pursue first to collect owed taxes.

Insurance

Liability insurance is a must-have for business owners. It’s recommended to look into an umbrella policy to cover anything the liability insurance doesn’t.

Commingling

Commingling is a sure way to end up being personally responsible for something within the business. Commingling is a legal term to describe the mixing of personal and business expenses. Avoid this all together and you will steer clear of plenty of issues.

Just know that attorneys for creditors will be happy to see personal expenses being paid with your business checks. They will have the ability to attempt at taking personal and business assets.

To avoid commingling completely:

  • Deposit income into the business account
  • Pay any business expenses from that account
  • Transfer net income to the personal account or issue a check

The most common thing business owners do are pay personal expenses out of their business bank account. You can tell when an expense is business or personal. For example, a car that’s in your name will likely have a car payment that’s your expense. Being sued personally is not a business expense. Other expenses such as child support or spousal support are also personal expenses.

Intellectual Property Protection

Protecting Ideas

There was a time when I spoke with a client who discussed she was working on a book to a friend. The friend took the book idea and discussed it with another writer who planned to make a similar book. The client wanted to know how she can protect her book idea. The unfortunate truth is that she spoke about it too early.

To understand why the mistake happened, basic knowledge of copyrights, patents, and trademarks is needed. It’s good to understand why they won’t protect the client’s idea and what non-disclosure/confidentiality agreements are.

Copyrights

Copyrights protect the original work of authorship on a tangible medium expressed in any way. The different works of authorship that copyright protects includes:

  • Literary – Books, Blogs, Poems, Interviews, Textbooks, Advertising (printed text)
  • Dramatic – Plays, Choreography, Scripts, Screenplays, Operas, Choreographic Shows
  • Musical – Songs, TV and Film Audio, Recordings of Performance, Voiceovers
  • Artistic – Maps, Photographs, Paintings, Sculptures, Logos, Blueprints, Buildings

Copyrights do not protect facts, ideas, systems, or methods of operation. However, they can protect how they are expressed.

What does this mean for the client with the book?

The rights to her book are protected by the copyright because that is her actual written work on that idea. Therefore, the second writer would be violating the copyright if she uses any of her written material. However, if the second writer decided to use the idea and write about it in her own words, that would allow them to avoid copyright infringement.

Copyright infringement involves the unauthorized use of copyrighted material whether its reproduced, distributed, performed, publicly displayed, or made into a derivative work. There are different types of infringement and outcomes tend to vary.

Primary infringement involves directly using copyrighted material that is unauthorized by the copyright owner. If the second writer uses any of the client’s written material, that would be considered primary infringement.

Secondary infringement involves the authorized use of original work, but it was facilitated through another party. If the friend that the client told the information to decides to tell the other writer to use my client’s written content, then it would be a secondary infringement.

This type of process starts once the copyright infringement has been observed and the copyright owners send a cease and desist letter to the infringing party. Otherwise, a suit can be filed if there isn’t any correspondence.

What happens if a person or entity is found at fault for copyright infringement?

Being found willful (or guilty) of copyright infringement can be expensive. Normally this will result in damage fees, attorney fees (for yourself and the copyright owner), and additional damage costs if the court decides.

Patents

A patent protects inventions and discoveries, but not a tangible idea. It’s common to see applicants file for mechanical patents, e-commerce system patents, software patents, and more. There are three types of patents you can apply for:

Design Patents

This patent refers to the new, original design for an article of manufacture. There are about 33 different design patent classifications such as photography, tools and hardware, edible products, jewelry, packages, and clothing.

A good example is the design patents that Apple obtains for its iPhones.

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Utility Patents

Utility patents protect new inventions and systems. The invention or system must be new, functional, and nonobvious according to the USPTO. The patent can protect different variations of the invention or system. Patent holders have the exclusive right to prevent others from selling, making, or using inventions. An example of utility patents is control systems.

Plant Patents

Plant patents protect new and unique plants and their key characteristics. Under the plant patent, a plant cannot be copied, sold, or used without the patent holder’s consent. The plant can be natural, bred, or created with non-reproductive cells.

Below is an example of patented variations of the poinsettia plant.

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So what cannot be patented that may still qualify as an invention?

There are several categories:

  • Mathematical formulas
  • Inventions made for illegal activity
  • New drugs deemed to be unsafe
  • Laws of nature
  • Processes of human coordination
  • Surgery methods or protocols
  • New and natural substances

Once granted, patents are valid for 20 years. We live in a growing world with so much innovation and technology that most patents become obsolete within two decades. In the client’s case with the book, she would not be protected with a patent being that it does not particularly qualify.

Trademarks

Trademarks protect words, phrases, symbols, and designs, that identify the goods and/or services from one entity separating them from others. If the client with the book had a publishing company, she could trademark its name but it would not necessarily cover her book.

Trademarks can be a confusing and complex issue for startups and their startups and their entrepreneurs. Most people know they need a trademark to protect their brand, but most general knowledge on the topic seems to end there. The first thing you need to know about trademarks is that it generally comes down to a business decision, not a legal decision.

It comes down to knowing how much protection you want and what your business funds allow. That’s in addition to the format you choose for trademarks to protect your brand.

And, because it can be more complex than most people realize, it’s often an area where people make mistakes that are expensive to fix. Protecting your intellectual property should be something that’s done early in the startup phase of a business.

Standard Character Format

The standardized character format is used to protect letters, words, numbers, or a combination of those without claiming any particular font, color, design, or style. This provides the broadest rights for your trademark and allows you to use those words, letters, and numbers in any matter.

Coca Cola Logo 1886 1887

This is an example of a standard format trademark with a simple color and font with no design.

Stylized or Design Format

The stylized or design format is what you might use after you choose a fancy design or logo. This format is used to protect words, letters, and numbers, when they appear in a specific font, color, design, or style. This is also the trademark to protect a design or logo that may not contain words, letters, or numbers.

If you specify one color, your protection will be limited to that color. Any other color won’t be protected by that mark. So if you register your design in blue, and change it to green later, you will have to file for a new trademark to protect your new design.

Starbucks logo

This is an example of a design trademark. Starbucks is the trademark holder of this design with its green color.

Which one should I file?

Well, that depends on your exact situation. If you can afford it, filing for both will be better protection than just one or the other. In most situations, clients have enough resources for just one. In this case, the standard format trademark is best.

When considering the standard format trademark, it is usually protecting your brand name which is your identification in the marketplace. It’s what people associate with your products or services. Just be careful in choosing your brand name because you’ll have to change it if you ever receive a cease and desist letter. You’ll have to tell everyone about the new name and that can be costly.

Trademark Classes

When you decide on the trademark you are going to file, you’ll need to decide what class of goods you want to protect. The class of trademark determines which types of goods or services your mark applies to.

The most simple way to describe a class is what your customers purchase from you. If it’s tangible, that would be considered a good. If you’re hired to perform some activity, you offer a service.

The USPTO publishes an ID Manual with thousands of approved descriptions. If one of those identifications accurately describes what you’re selling, you can use that. If you can’t find an accurate description, you can also request to add your own.

You must get your description right the first time. You can’t add the description later, or even change it once it’s filed. Any changes require a new application.

Now, let’s suppose that you’ll be selling more than one type of good. The descriptions are organized into 45 classes. While you can use more than one description in a particular class, the cost of the trademark is based on how many classes you want to protect. Since each trademark is $350, attempting to put your mark on goods in different classes can add up quickly.

It is important to properly identify your goods, spending some time evaluating which marks you want to protect, and evaluating the most effective method of protecting your mark.

Statement of Use Extensions

One of the requirements of a federal trademark application is that you must be selling the product using the mark across state lines. In legalese, this is interstate commerce and gives the federal government and the United States Patent Trademark Office (USPTO) jurisdiction to register your trademark. This presents a problem to business owners who are doing business in only one state but plan on expanding to other states.

If you have not started selling your product interstate, but still want to go ahead and protect your mark, you can file your trademark application on Section 1(b) of the Trademark Act. This is commonly called an “intent to use” application. This type of application allows you to register your mark, but you won’t have full trademark protection until you file a statement of use.

After filing your application, you’ll have six months after the trademark office issues a notice of allowance to file a statement of use. The cost of filing the statement of use is $100, per trademark application class. The purpose of this statement of use is to declare that you’re actually using the mark in interstate commerce, and would like to activate the trademark registration.

If you have not begun selling across state lines yet, you can request a six-month extension. The fee for the extension is $150 per application class. And since you may only request four extensions, this amounts to 2 years of time in which you can “lockdown” a trademark you intend to use.

Infringement

Trademark infringement is a lot like copyright infringement. The only real difference is that different types of intellectual property are misused. You’ll be sure to face the legal fees you would have just like copyright infringement. Seizure of goods that use the trademark could happen and most certainly an injunction to stop producing goods under the trademark.

Cyber Security

Reduce Hacker Liability

Over half of hackers enter through exiting remote access applications. Think about the cloud, remote desktop, LogMeIn Ignition, or some other program you use to log into your systems via the internet.

More than likely using weak passwords and unencrypted networks that can reveal passwords are the biggest to blame. Be sure to use strong passwords and use a secure network when online.

Use programs like LastPass to generate and store passwords for better protection. Use 18 character alpha-numeric passwords, and a different one for each website. Avoid public networks that a person would use at a restaurant or office. It’s much safer to use the internet connection at home.

Sensitive Information

As a business owner, it is not best to store customer credit card information. Credit card information accounts for most hacking targets, so use a credit card processor to handle your card transactions. Don’t store the information, and leave the security up to someone else.

Avoid saving business credit card information with online merchants as much as possible. Try to only use online merchants that use Paypal. It’s understanding about the convenience of saving payment information but it’s not necessarily safe.

Existing Protocols and Malware

Most data is extracted by hackers via malware and “existing protocols”. Malware is a software that is made to access and disrupt another computer system. Existing protocols most likely account for using a protocol such as an email to send files out.

A firewall may limit the number of existing protocols that are available on your computer. As for malware, avoid shady websites and make sure you have malware detection and removal software installed on your computer. Update it regularly, and use that full scan feature consistently.

Insurance

Types of Coverage

There are several different insurance policies every business should have in place. Every business is different so every business should have a policy tailored to their specific needs.

General liability covers damages done at the fault of your business.

This can include:

  • Bodily injury
  • Personal liabilities (i.e. infringements, invasion of privacy, etc.)
  • Property damages
  • Medical payments (incidents on business property)
  • Legal defense

It is highly recommended to have this insurance in place if your business has accumulated assets.

Property liability is coverage if you or any of your employees make a mistake that could lead to lawsuits.

For example, a hairstylist could damage their client’s hair from using the wrong products or techniques. This is the type of insurance to help handle any possible lawsuit that a business could endure from that.

Worker’s compensation is the coverage that helps when employees get injured in the workplace.

This helps take care of medical costs and lost wages the injured will have. Any business with employees that are not owners will be required to have this insurance.

Home-based business insurance protects the equipment and inventory the business owner has at their residence.

Rental insurance and home insurance typically doesn’t cover business equipment and inventory, but you can contact your insurance provider and confirm.

Product Liability pertains to the protection of business if a product damages a customer.

More than likely they will sue if the damage is moderate, so coverage should be created specifically for the products you offer.

Umbrella insurance helps take care of anything your main policies cannot fully cover.

Based on the coverage amount on your policies, it may not be needed. It’s just an insurance claim backup.

There are also other insurances such as vehicle insurance and unemployment insurance that your business can obtain if needed. Determine with an insurance provider what’s best for your business.

Communicating with Your Agent

When asking your insurance agent questions, you need to be specific. Asking “Am I covered?” is just not sufficient.

The best advice is to imagine different scenarios as possible, list them out, and work them individually to determine whether or not coverage would apply.

Let’s say you own a bar. You might think of possible scenarios like:

  • Violence inside your bar resulting in damages and a lawsuit
  • A natural disaster that temporarily puts you and your employees out of work
  • A bartender or other employee injured from slipping and falling on a wet floor
  • A customer getting sick from consuming your food and drinks

Think of as many as you can pertaining to your business and walk through them to get an idea for the necessary coverage. But knowing what to communicate is just part of the process.

Do your research and find a reputable insurance broker. There are plenty of unreliable insurance agents out there. The last thing you want is to ask for policy and jump through hoops just to obtain a copy.

Look into getting premium adjustments on your policies. For bureaucratic and administrative reasons, 5 minutes spent proactively making adjustments could potentially save hours fighting customer service to retroactively change balances.

Reviewing Policies

If you don’t fully understand insurance lingo or know every detail of your business policies, don’t feel bad. Insurance policies are not always black and white, and it’s common for a provider and an insured to dispute whether or not coverage exists. There are attorneys that help in this area.

Get a copy of your actual policy. This isn’t always sent when you purchase the policy, so you may have to ask your agent for it. The policy itself is probably 60+ pages, but most business owners are accustomed to just seeing the declarations page.

The declarations page is usually just one or two pages indicating the amount of coverage. It’s normally used as proof of insurance.

Tip: If you struggled to obtain a copy of your insurance policy, you have an even harder time filing a claim. Consider this a test of responsiveness and if they don’t meet expectations, look elsewhere for insurance coverage.

Reading Your Policies

Insurance policies can be daunting, but if you’re intelligent enough to start a business, you’re absolutely intelligent enough to read and understand the policy itself. The policies are typically written more clearly than people realize.

An important point to know is that things that aren’t in a policy are just relevant as things that are. An unfamiliar eye may not realize that a common policy provision isn’t in a particular agreement.

Reviewing Coverage

First, find the part of the policy that starts talking about coverages. The particular language changes, but it’s usually toward the beginning of the policy. Coverages are usually in enumerated paragraphs with many subparagraphs.

If your policy only includes bodily injury, advertising injury, and medical expenses, you are likely to not be covered because of forced closure, pandemic, or anything similar that’s not included in the coverage. If an agent tells you that you aren’t covered for something, it may not be because the policy says you are specifically not covered. You won’t be covered because the type of loss isn’t listed in the coverages section of the policy.

Review Exclusions

An exclusion means that some event is within coverage limits, but that the insurer has excluded something within that coverage. It’s basically, “you’re covered, but not in these certain situations” dressed up in insurance lingo.

For example, we recently worked with a gymnastic instructor who purchased a GLCI policy. The policy specified that it would provide coverage if someone was hurt at her facility. However, it excluded injuries that occurred while someone was doing gymnastics. It was an odd case that took nearly two years to resolve, but it perfectly explains how coverages and exclusions work.

If Your Business Has Been Affected By the Virus

If going through your policies and you determine that you don’t have sufficient coverage for this pandemic, don’t be discouraged. Unfortunately, you cannot buy insurance after an event happens and get covered for it. However, you can at least take the next steps and protect your business.

Consider Filing a Claim

If you file a claim, you’ll force your insurance company to review your claim against the policy and make a written determination on coverage that outlines whether there’s coverage or not.
Sometimes the advice is not to file a claim because the premium could go up. This varies from insurer to insurer, so there’s no telling how much of a difference it could make to your premium. It could be 0.01% or even a 5% increase.

If you’re not aware, claims must be filed within a time period such as 30 days from the date of loss. If you don’t file a claim in time, you could lose your right to file a claim. If you aren’t sure about whether or not you should file, talk with your insurance agent and attorney.

Claims Filed By Former or Current Employees

Businesses and Congress have been focused more on revenue loss from quarantine. What many chose to look over are the normal risks that have always existed. Claims against businesses have more than likely spiked during this time.

In normal times, employees will tolerate a number of things from unfair conditions to even illegal behavior. The benefits of receiving a steady payback sometimes outweigh the bad things that could motivate them to file complaints. However, hours have decreased, mass layoffs occurred, and former employees have become desperate.

It isn’t just well-supported claims either, it’s also the tenuous claims where former employees are willing to accept the lowest of settlements while their income is gone. Everyone is focused on the immediate crisis, but they are not seeing the wave of “insider threat” claims that could hit if things get worse.

Business owners should prioritize calling their insurance brokers and making sure everything is prepared and organized. If they could afford it, they should also consider increasing coverage limits.

Disputes

Mediation

Before there was a client that wanted to resolve a dispute quickly, and understood that he would have to spend more money. It was recommended that mediation would be the best method.
The process took several months versus the years it could have taken in court with thousands in attorney fees. What is mediation?

Mediation is a non-binding negotiation between parties. Each party goes into a separate room, where they meet with their attorney and the mediator. The mediator is a third party, who hears the arguments of both sides and helps them to reach a place in the middle where both parties are happy. The mediator’s main goal is to figure out what each party wants and then help them reach an agreement. By separating parties, the mediation process removes that adversarial feeling and helps remove the strong emotions that parties may have for each other.

Mediation isn’t always cheaper than going to court. Generally, it will be cheaper because you won’t have to spend much on legal fees, but as with any litigation, whether or not mediation saves you money depends on your circumstances. The mediation process will almost always be quicker than going to court, so if both parties would like to end the dispute quickly, mediation is the way to go.

Litigation

Litigation is every business owner’s worst nightmare. It costs money and takes up your valuable time. In the end, it can even harm the reputation of your business. Unfortunately, litigation can’t always be avoided. But there are a few best practices that business owners should follow to reduce the risk of being sued by employees, clients, or customers.

First off, you need to plan for a lawsuit. Sometimes, you can’t avoid litigation, so invest in legal advice if you have concerns about the issue. You should also build a litigation budget into your business plan. It is always better to be proactive than reactive. Paying an attorney to help you prevent a possible dispute will be less costly than waiting until it turns into a lawsuit.

Written agreements are another key to reducing the risk of litigation. The main contracts you should have are:

  • Business partnership agreement
  • Master service agreement for clients
  • Contracts for independent contractors
  • Employee agreement

The agreement itself needs to be reflected in the contract. Too often, small business owners sign a “contract” that doesn’t reflect their “agreement”. It needs to clearly state the terms, conditions, and responsibilities of each party. The contract can even serve as a foundation for your business attorney to file a motion to dismiss the lawsuit.

Make sure you have the proper insurance policy and coverage in place if litigation ever happens. It can be costly, so be sure to have your insurance company foot the bill.

Tip: People are less likely to file a lawsuit if they are being treated with kindness. Many conflicts can be settled out of court.

If Something Happens to You

As a business owner, planning your death is vitally important not only to your family, but your employees, customers, and vendors.

Wills

You’ll need to ask yourself a few questions to check if you have a proper plan in place. If your answer is no to any of the following questions, then you may want to consider speaking with an attorney to get your will set up properly.

  • Do I have a will?
  • Is my will up to date?
  • Do I have a living will?
  • Have I renewed my will and trust in the last 3 years?

Make sure all information is included in the will such as beneficiaries, assets, debts, and executors. Not only is taking care of your personal life important if something happens to you but your business needs a plan if something happens to you.

Plans for Employees

If your business will be set up to continue after you are gone, plans need to be created to make the adjustment easier for everyone involved. Ask yourself:

Do I have a plan for key employees if something happens to me?

Make sure that you are clear on who will have what responsibilities such as who would be taking your role, or least have the authority to decide who. Key employees keep the business going, so make sure they have the direction they are going to need.

Ownership

Just because you have a successor for the business, they do not necessarily have your ownership of the business. Determine in your plan who will have ownership and if it will be divided in any way.

Writing down who all your trusted advisors are such as attorneys, your insurance agent, and the accountant will be helpful during this process. They are an important resource during a time like that.

Conclusion

When things happen while running a business, you want to cover yourself. Nobody wants to endure a loss so critical where both areas of your life are compromised. Do what you need to do to protect your business and your family.

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