Disclaimer: This guide to limiting liability for business owners does not contain legal advice. The availability of different techniques for limiting legal risk will depend on the unique circumstances of your business. If you want to discuss legal questions related to your specific business, consider booking a consultation with an Alberta business lawyer.
Starting a business can be exciting, but it also comes with its share of challenges. One of these challenges is limiting liability for business owners.
Whether you’re in the business of selling lemonade, explosives, or SEO services, operating any business will always involve risk. If it didn’t, everyone would start a business.
Although it’s impossible to completely eliminate ALL risks of owning a business, there are several things that business owners can do to significantly reduce their risk of personal liability.
This guide will help you as a small business owner protect your business and personal assets. We’ll start by discussing what liability is, and common ways that it arises in business. Then we’ll provide 10 practical ways that business owners can reduce their risk. Let’s dive in.
Understanding Liability In Layman’s Terms
What is Liability?
Liability put simply, is the responsibilities and obligations you and your business have towards others. This could be towards customers, employees, other businesses, or even the government.
Imagine you own a store, and a customer slips on a wet floor. You could be held responsible or “liable” for their injury, even if you didn’t spill the water yourself. Liability is a binding legal obligation, and it’s essential to recognize what it means for your business.
Examples of Typical Liabilities in Businesses
Understanding where liability comes from is key to protecting your business and personal assets. Common examples of liability that can arise in business include:
- Product Liability: If a product you sell harms a consumer due to a defect or failure to warn about potential risks, you could be held responsible. Whether it’s a malfunctioning electronic gadget or a food product causing an allergic reaction, product liability claims can be costly.
- Contract Liability: Contracts are legally binding agreements. If you enter into a contract with another person or business and fail to comply with the agreed terms, you could be sued for breach of contract. This could apply to anything from failing to deliver goods on time to not providing the promised quality of service.
- Tax Obligations: If your business makes money, the government will want to take its share. Depending on how the business is structured and the role you play, you may be personally responsible for making sure that the taxes are paid.
- Employee Actions: The actions of your employees can cause liabilities for your business. If an employee makes a mistake or does something improper while at work, you could be held personally liable as their employer. This is what’s known as “vicarious liability”.
- Debt Obligations: Borrowing money to expand or support your business is common. If the business fails to repay the debt on time, creditors will likely pursue legal action.
- Intellectual Property Issues: Using someone else’s intellectual property without permission could lead to liability. Whether it’s using copyrighted material on the internet or infringing on a patent, failing to use care can lead to lawsuits and significant damage claims.
- Occupiers’ Liability: If someone is injured on your business property, whether it’s a customer, vendor, or even a trespasser, you may be liable for their injuries. This includes everything from slip and fall accidents to injuries caused by faulty equipment.
While it’s unlikely that all of these examples will apply to your business, the risks associated with even a single example listed above could have serious consequences. Proper risk management strategies are essential to limit the potential impact these liabilities may have on your business and personal assets.
Now that we understand what liability is and how it can arise, let’s talk about steps you as a business owner can take to reduce the risk of liability.
10 Practical Steps to Limit Liability for Business Owners
1. Choosing the Right Business Structure
In Alberta, choosing the right business structure is vital to limiting liability for its owners. Here are the most common structures:
- Sole Proprietorship: This is where you, as the owner, are the business. Bank accounts, contracts, debts, and assets are all in your personal name. This is the easiest form of business to start, but it also involves the most risk. There’s no separation between you and the business, which means that you can be personally liable for pretty much anything and everything related to the business, including the conduct of employees.
- Joint Venture: This is a temporary partnership between entities or individuals for a specific project. Liabilities are usually shared and the structure can be complex. Joint ventures are rarely used by small business owners due to their complexity, risk of shared liability, and the costs involved with setting them up.
- Partnership: In a regular partnership, two or more individuals share the responsibility and profits of the business. They also share the liabilities. So if you’re in a partnership, and your partner does something on behalf of the business that results in a lawsuit, it’s likely that you will be sued personally as a partner. While there are other partnership structures such as a limited partnership (used primarily for large property development and investment firms) or LLP (used for professionals such as accountants and lawyers) that can impact the potential liability of owners, these structures are unsuitable for the vast majority of small businesses.
- Corporation: Registering a business as a corporation in Alberta separates your personal assets from your business assets. That’s because when you incorporate, you are creating a new legal entity that is separate from you as the owner. The corporation is the one that enters into contracts, hires employees, and takes on the debt of the business. Although there are exceptions, generally speaking, the corporation is the one at risk when things go wrong, not the individual owners. This means that if your business (the corporation) faces any legal claims, your personal property like your home or car would typically be safe. The downside of incorporating is that it will result in additional legal requirements and costs.
Incorporation acts like a quarantine for potential business liability. It can help prevent the spread of business liability to your personal finances and other assets.
Although there are alternatives to incorporating, only incorporation provides substantial owner liability protection. If you’re concerned about liability, you should strongly consider incorporating the business.
If you’re still on the fence about whether incorporation is the right structure for your business, consider completing our Incorporation Quiz to help determine if incorporation is the right choice for your business.
2. Obtaining Business Insurance
Understanding and investing in the right kind of insurance for your Alberta business can greatly reduce the risk of business liability. The following are examples of different types of insurance you may want to consider for your business:
- General Liability Insurance: Covers accidents or injuries that may occur on your business premises. It could help pay for medical expenses or legal fees if a lawsuit arises.
- Professional Liability Insurance: If your business involves providing professional services, this insurance can cover claims related to mistakes or negligence in the service provided.
- Property Insurance: This covers damage to business property, including equipment, furniture, or inventory.
- Workers’ Compensation Insurance: Mandatory in Alberta, it provides benefits to employees who are injured on the job.
- Cyber Liability Insurance: With the increasing threat of cyber-attacks, this insurance covers damages related to digital data breaches or losses.
- Director and Officer Liability Insurance: Provides protection from personal liability that can arise for Directors and Officers of a corporation (discussed further below).
Purchasing the right policies with adequate coverage limits protects your business from the financial impacts of claims, lawsuits, and other losses. It can also protect you personally. We recommend consulting with an insurance broker (or better yet, several of them) to determine appropriate types and amounts of coverage.
3. Preparing Proper Contracts and Agreements
Contracts and agreements are the backbone of business relationships, but they can become a liability if not handled correctly. Here’s how to simplify the process:
- Get it in Writing: It can be very difficult to enforce a contract that is not in writing. Always insist on written contracts, and be sure that you have read and understand the terms before agreeing to them. Seek legal advice when necessary BEFORE signing the contract.
- Use Clear Language: Avoid legal jargon. Use plain, simple language to describe the terms and conditions. Make sure that there is no ambiguity that could be left open to interpretation.
- Specify the Obligations: Clearly outline what each party is expected to do and by when. This is the best way to make sure that both parties are on the same page and avoid disputes.
- Include Termination Clauses: Define what constitutes a breach of contract and how the agreement can be terminated by either party. You’ll need this if things don’t go as planned.
- Use Full Legal Names: If operating your business through a corporation, it is critical that any contracts you enter into on behalf of the business are signed by you as an agent for the corporation, not as an individual. This means clearly including the full legal name of the corporation on the contract, and being careful not to suggest that you are signing the agreement in your personal capacity.
- Limit Your Obligations: Using liability waivers, limitations of liability, indemnity clauses, and other contractual provisions can significantly restrict your legal exposure when transacting with vendors, partners, and clients.
When entering into important contracts for your business, we strongly recommend getting legal advice BEFORE you sign. DO NOT rely on standard forms found on the Internet, or worse yet, an AI system like ChatGPT. While these can be great resources, it is very rare in our experience for contracts obtained in this manner to be free from significant errors and issues that can put your business at risk.
4. Implementing Appropriate Employment Practices
If you don’t plan on having employees for your business, feel free to skip this section. However, if you DO plan to have employees, this is essential reading, as employees are a very common source of potential liability.
As an Alberta business owner, your employees are integral to your success, and your employment practices can significantly impact your liability. Consider the following:
- Insist on Employment Contracts: Unless you love paying expensive lawyers, or want to pay large severance cheques to employees you’re forced to fire, it is extremely important to have your employees sign written employment contracts BEFORE they start working for your business. As with your other business contracts, we strongly recommend that your employment contracts are drafted by an Alberta lawyer. This can help to avoid issues with contract wording or missing provisions that can have devastating consequences for your business.
- Create Employee Handbooks: Outline company policies, expectations, and legal obligations clearly to avoid disputes. Ensure that the policies are regularly followed and that any breach of the policies is clearly documented and communicated to the employee in writing.
- Implement Regular Training: Ensure that your business commits to ongoing training on workplace safety, harassment prevention, and other key topics. Taking steps to train your employees can help to prevent problems from occurring. It can also protect you in the event that something goes wrong.
- Keep it Legal: Ensure that you are complying at all times with employment laws when hiring and firing employees. This includes the Employment Standards Code or Canada Labour Code (depending on your business) and applicable human rights legislation. Unless you’re a lawyer or HR professional, you should get advice from a professional before proceeding with the hiring or firing of employees.
Following these simple practices can significantly reduce potential liability related to employees.
5. Avoiding Personal Guarantees
If you are operating as a sole proprietor, it’s unlikely that you’ll be required to provide a personal guarantee. This is because you are already personally liable for everything related to the business, including business debts and contract obligations.
If you’re operating the business as a corporation, you may be asked to personally guarantee the obligations of the corporation. This is because a newly formed corporation normally doesn’t own the assets or have the credit history necessary for banks, landlords, and other service providers to rely upon. Operating through a corporation adds a layer of protection, but providing a personal guarantee can pierce that shield. A personal guarantee is a legal promise where you agree to be personally responsible for the company’s debts or obligations if the business fails to meet them.
While banks might require a personal guarantee from the owners of new corporations for loans or credit lines, personal guarantees are almost always negotiable in other contexts (such as a commercial lease). If you can avoid providing a personal guarantee for your business, you should.
Already extended a personal guarantee? As your business grows and establishes credit, you may renegotiate or recover it so that it doesn’t guarantee future debts. This is important if you want to retain protection for your personal assets. It’s also important to remove all personal guarantees if you ever sell your business. No one wants to remain on the hook personally for a business that they no longer own.
6. Following Regulations and Complying with Rules
Staying compliant with regulations isn’t just a legal necessity, it’s a vital part of limiting liability. Consider these tips for remaining compliant with relevant rules and regulations and rules that may apply to your business:
- Understand Local Regulations: Research and understand the specific rules and regulations that apply to your industry. Use BizPal.ca to help identify potential rules and regulations that may apply to your Canadian business.
- Implement Compliance Strategies: Create systems and procedures to ensure continuous compliance with laws. Make sure to review things regularly and keep a record of your compliance monitoring steps. This can help to demonstrate due diligence.
- Appoint a Compliance Leader: Make sure that someone on your team is responsible for ensuring that the business remains compliant.
- Seek Professional Assistance: Consulting experts can help to ensure compliance. It can also give you peace of mind.
Violating regulations can result in stiff fines, lawsuits, and even damage to your business’ reputation. Make legal compliance a priority.
7. Being Aware of Director and Officer Liabilities
If the business is being operated through a corporation, it will need to have directors and officers. Operating your business through a corporation provides significant protection from liability, particularly as it relates to acts of employees, contract disputes, and financial obligations, however, there are still situations where directors or officers of a business can face personal liability. This includes but is not limited to certain tax obligations and environmental liabilities. For this reason, it is important to carefully consider who to appoint as a director or officer of your corporation. Having director and officer liability insurance in place can help to reduce this risk, but won’t completely eliminate it.
A full discussion of director and office liability is beyond the scope of this article. To learn more, book a legal consultation with one of our incorporation lawyers.
8. Implementing Health and Safety Practices and Sticking to Them
Implementing prudent health and safety practices demonstrates a duty of care and due diligence, strengthening your defense in liability disputes. Here are simple steps that you can take to help demonstrate that you have taken reasonable steps to avoid the harm that may be caused by your business or employees:
- Put Standards in Writing: Create standardized policies, procedures, and training materials. This is particularly important as it relates to matters of safety.
- Maintain Records: Maintain detailed records of key decisions and transactions related to health and safety.
- Comply with Health and Safety Rules: Make sure that you understand and comply with any health and safety regulations that may apply to your business.
- Review Frequently: Audit practices regularly to identify risks. Document any issues that may be identified, and keep a record of steps taken to resolve them.
- Consult with Experts: Consult with health and safety professionals to ensure that the appropriate standards are put in place and monitored.
If incidents occur, thorough documentation can help prove you acted responsibly. Just be sure to remember that having rules on paper is not enough. You must be able to demonstrate that rules were implemented and regularly followed.
9. Maintaining Your Corporation
If you operate your business through a corporation, that corporation must be maintained to remain active and in good standing. This means maintaining appropriate corporate records, ensuring that any corporate changes are recorded with the government, and filing corporate annual returns.
Failure to maintain your corporation could lead to a loss of legal protections and penalties. It may also result in your corporation being struck from the register, meaning it no longer exists as a valid entity. If the corporation no longer exists, neither do its legal protections.
When you incorporate with allincorporated.ca, you’ll receive 1 year of corporate legal support services to help you maintain your corporation. After the first year, we offer these services for a low annual fee.
10. Working With a Lawyer
Getting input from a lawyer upfront can help to prevent headaches down the road.
A lawyer can help you decide on the appropriate legal structure, and if you decide to incorporate your business, they can help you to set it up correctly. In fact, that’s the whole reason that this website was created in the first place.
After years of being asked to fix problems caused by business owners trying to incorporate a business themselves, we decided that there had to be a better way. That you should be able to experience the convenience and lower cost of incorporating a business online, but still have documents prepared by an actual practicing business lawyer.
Common Problems Caused by Failing to Get Legal Advice
Some of the issues we witnessed firsthand from business owners trying to incorporate on their own without a lawyer include:
- Using the Wrong Structure: Failing to set up an appropriate share structure, leading to higher tax obligations and expensive amendment costs;
- Restrictions on Business: Unintentionally restricting the type of business the corporation could operate;
- Appointing the Wrong People: Appointing the wrong individuals as directors and officers, leading to unnecessary liability risks;
- Choosing a Bad Name: Failing to appropriately vet their chosen name, leading to claims of infringement and costly rebranding;
- Maintenance Failures: Misunderstanding the requirements to maintain the corporation, leading to unnecessary cost and risk from the corporation being inadvertently struck; and
- Lack of Documentation: Failing to properly document ownership and decision-making, leading to expensive shareholder disputes and questions related to who actually owns the business.
Lawyers can help to ensure that you check all the legal boxes and avoid these problems. That is exactly what we are trained to do.
Yes, lawyers cost more than DIY. But do you want to hope you did it right? Or pay a small, one-time fee to know that it is done correctly?
In our experience working with thousands of business owners over the years, successful business owners spend money to save time. Unsuccessful business owners spend time to save money. Which one are you?
Bonus: Corporate Structuring Techniques (Advanced)
Depending on the size of your business and the value of its assets, it may make sense to set up a holding or asset corporation that is separate from the corporation that operates the business. This can be useful for tax purposes, allow for different options when it comes time to sell, and may also limit legal risk.
For example, if a business intends to purchase a building or other significant asset, it may make sense to have the asset owned by a separate corporation. This could prevent these assets from being at risk in the event of a lawsuit against the operating corporation. It could also make it easier to sell the assets, without selling the business.
These are complex issues that depend on your tax circumstances, ability to pay for additional costs, and other considerations. If you are interested in more advanced corporate structuring techniques, we recommend consulting a lawyer and accounting professional. If you need help with this, feel free to contact us at All In Business Law.
In this comprehensive guide, we’ve explored the various aspects of business-related liability, from understanding its basics to choosing the right business structure and taking practical steps to limit potential risks.
Remember, every business is unique, and a one-size-fits-all approach doesn’t apply when it comes to limiting liability.
Although operating a business will always involve some risk, with proper care, due diligence, and support, it can be significantly reduced. It’s critical that you take steps to understand the risk involved with your business and take proactive steps to address them before they become problems.
If you have additional questions, feel free to book a consultation with an Alberta business lawyer today.
Frequently Asked Questions (FAQ)
As lawyers, we get asked all the time about how business owners can limit their personal risk. Here are answers to some of the questions that are most frequently asked:
Business liability refers to the legal responsibilities and obligations a business has. It includes debts, claims for damages, lawsuits, and other financial risks that arise from business activities and operations.
Limiting liability can protect both the business itself, but also the owners of that business from potentially losing their personal assets to cover business debts and legal claims. It ensures their personal finances and property are shielded if the business faces lawsuits or can’t pay its obligations.
Common liabilities arise from situations like customer injuries, employee disputes, breaches of contract, professional mistakes, product defects, and noncompliance with the law. Financial obligations like loans and leases can also create liability for a business and its owners.
The most common business structure that provides liability protection in Alberta is registering the business as a corporation. Other business structures like sole proprietorships and partnerships expose owners’ personal assets to business liabilities. Although there are other potential structures that can provide some protection from liability (such as a joint venture, limited partnership, or LLP), these structures are rarely appropriate or available for most small businesses.
Incorporating a business means forming a corporation to legally operate the business. This establishes the corporation as a separate legal entity from the owners and means that the corporation is the one that will enter into contracts, hire employees, and maintain operations, rather than the individual owners.
The primary benefit of incorporating a business is liability protection. By separating the business from its individual owners, the corporation can shield the owner’s personal assets from potential claims or debts of the business. In essence, incorporating transfers risk off the owners’ shoulders onto the corporation’s. Other benefits include potential tax savings, name protection, increased credibility, and transferability of ownership.
Strategies like incorporating, getting business insurance, using liability waivers and disclaimers, structuring contracts carefully, following employment and regulatory laws, maintaining compliance, and implementing prudent business practices can all contribute to lower risk and limit potential liability for the business and its owners.
General liability, errors & omissions/professional liability, property insurance, directors & officers insurance, cyber liability, and workers’ compensation policies all help limit various liabilities. It’s best to speak with a knowledgeable insurance broker about the forms of insurance that may be available for your business.
Not operating the business through a corporation, failing to document things properly, skimping on insurance, ignoring regulations, careless hiring practices, personally guaranteeing debt, and failing to structure the company optimally are some costly errors.
Yes, lawyers experienced with small businesses can provide tremendous value in reviewing contracts, structuring your company properly, advising on liability limitation strategies specific to your operations, and helping your business to comply with applicable rules and regulations.
Compliance shows you are taking reasonable steps to meet standards and lowers liability risks. Non-compliance can lead to lawsuits, fines, and reputational damage.
Working with a lawyer or service like allincorporated.ca provides guided expertise to handle incorporation correctly. DIY incorporation without legal advice may save you a few dollars, but in our experience, it often leads to mistakes, missing documents, and non-compliance with Alberta’s legal requirements. These problems can be difficult and expensive to fix.
The timeline varies based on various factors, including the jurisdiction in which you are incorporating (Alberta or Federal), and whether you are selecting a named or numbered corporation. Utilizing professional services like allincorporated.ca can streamline the process.
These are different types of corporations that are available in the United States, but are not available in Canada. In Canada, the only types of corporations available for most businesses are provincial and federal corporations. Although there are some differences between federal and provincial corporations [insert link], they both provide equal protection from liability.
The typical range for an Alberta incorporation completed without the help of a lawyer, after taking into account a name search and government fees is between $500 and $1,000. In many cases, this includes registration only and doesn’t include the legal documents required to properly set up your corporation. For incorporations completed with the help of a lawyer, the costs typically range between $1,200 to $3,000. The cost to incorporate a business in Alberta varies based on the type of incorporation (federal or provincial, named or numbered), the service provider you choose, as well as any additional services required (such as assistance with ongoing corporate maintenance). Keep in mind that only a lawyer can provide legal advice and will almost always include a full corporate minute book, which is a legal requirement often overlooked by DIY services.
The decisions you make now can impact the success and opportunities available to your business. The best thing that you can do is make an informed decision, after weighing the pros and cons. You should speak with a lawyer to get more information before proceeding.