{"id":4914,"date":"2016-04-04T10:47:49","date_gmt":"2016-04-04T15:47:49","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/what-to-expect-business-liability.html"},"modified":"2025-11-10T00:41:00","modified_gmt":"2025-11-10T05:41:00","slug":"what-to-expect-business-liability","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/what-to-expect-business-liability.html","title":{"rendered":"What to Expect: Business Liability"},"content":{"rendered":"\n
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What to Expect: Business Liability<\/h1>\n\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Catherine Hodder, Esq.<\/a>\n | Last updated\n
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Editorial Note: We earn a commission from affiliate partner links on FindLaw. Commissions do not affect the editorial integrity of our legal content.<\/p>\n\n <\/div>\n \n

\n \n <\/i>\n Legally Reviewed\n <\/summary>\n\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

\n \n <\/i>\n Fact-Checked\n <\/summary>\n\n
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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n\n\n

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Business liability<\/span> is the responsibility a company faces for any harm or damages caused by its operations, products, or employees. This responsibility covers injuries, property damage<\/span>, and employee errors. Small business<\/span> owners<\/span> should understand the different types of business<\/span> entities and how they protect the owner\u2019s personal property<\/span> and assets.<\/p>\n\n <\/div>\n\n\n\n

When you run a small business<\/span>, understanding the business liability<\/span> with your business structure<\/a> is crucial. It’s about knowing the risks your business faces and how to protect it. This includes getting the right small business<\/span> insurance<\/span>. This can include general liability insurance<\/span> and workers’ compensation<\/span> insurance<\/span>. This insurance guards against financial losses<\/span>. Whether it’s a natural disaster<\/span>, a cyberattack<\/span>, or an accident at your workplace, having the right insurance coverage<\/span> can save your business.<\/p>\n

This article provides a brief overview of business liability<\/span>.<\/p>\n

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Business Liability<\/span>: A Brief Overview<\/strong><\/h2>\n

Business liability<\/span> involves responsibility for damages your business operations<\/span> may cause. This can include property damage<\/span>, bodily injury<\/span>, or even data breaches<\/span>. Insurance coverage<\/span> like a business owner’s policy<\/span><\/a> (BOP<\/span>) and professional liability insurance<\/span> protect small-business<\/span> owners<\/span>. Providers<\/span> of these policies, like insurance agents<\/span> and insurance companies<\/span>, can provide business insurance quotes<\/span> tailored to cover your business needs<\/span>.<\/p>\n

Remember, not all insurance products<\/span> are the same. Each type of insurance<\/span>, such as commercial property insurance<\/span><\/a> or cybersecurity<\/span><\/a> coverage, addresses specific risks. You should be aware of the types of risks your business might face. Use this information to decide which type of <\/span>insurance<\/span> policy<\/span> is best for you.<\/p>\n

Choosing the Right Limited Liability Structure for Your Business<\/strong><\/h2>\n

Choosing the right limited liability structure for your small business<\/span> is key. It affects your legal responsibilities and financial health. Each business structure provides different liability coverage<\/span> to the owners. Each structure, from sole proprietorships to corporations, has its unique implications. It affects how you manage your business, taxes, and personal liability.<\/p>\n

For example, consider a limited liability company<\/a> (LLC). LLCs can offer protection for your personal assets against business debts. So, this is a popular choice for many small-business<\/span> owners<\/span>. Meanwhile, a corporation can be beneficial for those looking to raise capital. But, these business forms come with more complex regulations and tax requirements.<\/p>\n

When deciding on the right structure, consider your long-term business goals, the nature of your operations, and how you plan to grow your business. Seeking advice from a legal expert<\/a> or a business adviser is often helpful. They can help ensure your decision aligns with your business strategy and goals.<\/p>\n

Liability by Type of Business<\/span> Entity<\/strong><\/h2>\n

There are other factors to consider before choosing a legal structure<\/a>. The following chart covers liability, business debts, and taxation under different business structures.<\/p>\n\n\n\n\n\n\n\n\n
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Type<\/p>\n<\/th>\n

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Is the owner\/investor personally liable for business debts?<\/p>\n<\/th>\n

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Is federal tax imposed on business income\/profits, or do income\/profits pass through to the owner\/investor?<\/p>\n<\/th>\n<\/tr>\n

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Sole Proprietorship<\/a><\/p>\n<\/th>\n

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Yes.<\/p>\n<\/td>\n

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Business income\/profits pass through and are reportable on the sole proprietor’s personal income tax return.<\/p>\n<\/td>\n<\/tr>\n

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General Partnership<\/a><\/p>\n<\/th>\n

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Yes.<\/p>\n<\/td>\n

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Business income\/profits pass through and are reportable on the general partners’ personal income tax returns. A partnership must file an informational tax return with the IRS.<\/p>\n<\/td>\n<\/tr>\n

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Limited Partnership<\/a><\/p>\n<\/th>\n

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A limited partner is not personally liable unless the limited partner is active in managing the business. A limited partnership must have at least one general partner who is personally liable for the business debts and obligations.<\/p>\n<\/td>\n

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Business income\/profits pass through and are reportable on the general and limited partners’ personal income tax returns. A limited partnership must file an informational tax return with the IRS.<\/p>\n<\/td>\n<\/tr>\n

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Corporation<\/a><\/p>\n<\/th>\n

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No.<\/p>\n<\/td>\n

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A C corporation<\/a> is taxed on its profits before distributing them to the shareholders. Shareholders are then taxed on the dividends they receive (double taxation). An S corporation is not subject to double taxation; the profits pass through to the shareholders, who report the distribution on their individual tax returns.<\/p>\n<\/td>\n<\/tr>\n

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Limited Liability Company (LLC)<\/a><\/p>\n<\/th>\n

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No.<\/p>\n<\/td>\n

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Business income\/profits pass through to the limited liability company<\/a> members and are reported on their individual income tax returns.<\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

What Are the Limits to Liability?<\/h2>\n

Every insurance policy has boundaries. These limits are crucial in defining how much insurance coverage your business receives in case of liability claims. For instance, a general liability policy might have a cap on the amount paid for a single claim or incident.<\/p>\n

This is particularly true in cases of business interruption, property damage, and injury. Homeowners insurance might not cover business-related activities for home-based businesses. This underscores the need for separate business insurance coverage.<\/p>\n

Liability policies, including those for\u00a0product liability<\/a>, come with predefined limits determining coverage. These limits are usually set based on the business’s insurance needs and risk assessment. For businesses with higher risk exposure, consider additional coverage options to extend these limits. This is especially relevant for business property, where the cost of potential damages could exceed the basic policy limits.<\/p>\n

Understanding the limits of your liability coverage is essential for protecting your business. Reviewing and assessing these limits with your insurance company is important. Ensure they align with the evolving nature and scale of your business. Adjust your coverage as your business grows and maintain the right level of protection against the diverse risks your business faces.<\/p>\n

Learn More About Business Structures and Liability: Talk to an Attorney<\/h2>\n

Only you and the other officers involved in your business know exactly where you want to take your business — and perhaps you’re not even sure. Looking into the future and assessing your goals is important. It helps when choosing which business structure best fits your operation. Remember that businesses may (and often do) change their structure as needed.<\/p>\n

Contact a\u00a0business organization attorney<\/a>\u00a0near you to learn more.<\/p>\n\n\n

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