How To Mitigate High-Risk Liability Exposure for Your Small Business

Starting a small business is inherently risky. Adding additional high-risk components may be a recipe for disaster if those extra risks are not properly addressed.

You can reduce some hazards inherent in a high-risk business through risk management. Business owners can limit business risk by forming a business structure that limits their personal liability and buying business insurance. Read on to learn about potential risks and how small-business owners can mitigate financial risks.

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What Is a High-Risk Business?

Certain industries are risky because of the products or services they sell. These businesses typically have high:

• Business liability insurance premiums on their insurance policies
• Rate of chargebacks by customers
• Regulatory factors

Examples of high-risk businesses are:

• Art restoration
• Assisted living homes
• Bars
• Cannabis businesses
• Childcare services
• Daycares
• Dog walking and pet sitting
• Gambling
• Gyms
• Hazardous waste handling
• Medical professional offices like doctors, hospitals, and counselors
• Online sales due to cyberattacks and cybersecurity breaches
• Pharmaceuticals
• Roller skate rinks
• Soft play playgrounds for youth
• Trampoline parks

While providing access to alcohol or caring for children doesn't sound inherently risky, there are risks for entrepreneurs in performing these activities. Serving a customer too many drinks at a bar or having a child suffer an injury on your watch leaves you open to a lawsuit.

High-Risk Business Activities

Not all risks come from your business operations. Many liability risks come from activities that happen during business hours.

While owning an antique shop may not seem like a risky small business, if an employee damages an item, you could be liable for property damage to the owner. If the item is high-value, the replacement cost would be very high.

Another high-risk business activity is workers' compensation. If an employee suffers a bodily injury while on the job, you are responsible for paying for it. While workers' compensation insurance covers most on-the-job liability claims, entrepreneurs should be aware of potential claims by employees.

• Building or repairing structures or vehicles
• Driving a vehicle while on the job
• Physically dangerous activities

The first line of mitigation defense to liability risks is properly structuring your small business when you form.

Business Structures

Whether it's a high-risk business or not, choosing a business structure is one of the first steps in starting a business. There is no perfect business structure. Some protect the individual members' liability risks more than others. For example, while a sole proprietorship is not subject to double taxation, it doesn't protect the owner from personal liability.

Selecting a business structure involves considering various factors, ranging from the cost and ease of setting up the business to tax treatment and the owner's personal liability.

Select a structure that works best for the business. Choose a structure that minimizes one's personal liability for high-risk businesses, like:

• Limited liability partnership
• Limited liability company
• Corporation

You should avoid being a high-risk business's sole owner or general partner. These business structures leave their owners open to personal liability for the debt and judgments incurred by the business.

Insurance Plans

A good insurance plan is crucial to any business, especially those involved in high-risk activities. Proper insurance company policies can protect you from liability, or at least limit your liability, in case of a problem or accident.

There are various types of insurance plans available to business owners with various insurance coverage policy limits.

• Some insurance plans protect you and your employees against customers (general liability insurance; professional liability insurance).
• If you have high foot traffic or operate in a dangerous area, consider commercial property insurance.
• Other plans protect you from your employees if they are injured on the job (workers' compensation).
• You can buy short-term and long-term disability insurance to protect yourself if you suffer from a serious illness or accident that results in disability.
• Online businesses or businesses that handle sensitive client information should buy cyber insurance to cover cyberattacks and data breaches.
• Product liability insurance is available for businesses that produce high-risk products, like candles.
• Business interruption insurance keeps cash flow in a business in case operations are paused (disrupted) due to natural disasters, flooding, or cyberattacks.
• Businesses that consult or offer professional services should buy errors and omissions insurance.

It's a good idea to research the types of insurance with your insurance agent. Pick the right one that fits your risk management plan and financial budget.

Risk-Management Strategies

If you start a high-risk small business, follow all federal, state, and local laws.

Regulatory Compliance

Some high-risk businesses face regulations from local, state, or federal governments.

• Clean Air Act regulates air emissions.
• The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) regulates hazardous waste sites.
• Department of Labor and the Americans with Disabilities Act (ADA) regulate employee interactions.
• Endangered Species Act protects endangered species and their habitats.
• Federal Communications Commission (FCC) oversees telecommunications and broadcasting.
• Food and Drug Administration (FDA) regulates the pharmaceutical and food industries.
• Occupational Safety and Health Administration (OSHA) sets standards for workplace safety.

Cannabis is illegal under federal law, but many states have strict regulations for its sale in states where it is allowed.

Risk Transfer Strategy

Risk transfer strategy is when a business transfers the responsibility of liability and damages to another person or company. The most common examples of risk transfer are insurance policies and contracts with indemnity clauses (liability waivers).

Contracts and Agreements

Another way to limit risks a business may face is to describe those potential risks in writing. Customers can sign a liability waiver to limit property damage. Having employees or independent contractors sign agreements can help lay out expectations and obligations. However, small businesses cannot waive worker's compensation liability in most states.

Crisis Management

One of the easiest ways to limit potential risks is to have a crisis management plan in place. This includes employee training on natural disasters. It also includes procedures when someone harms themselves or another at the business. Having employee, patient, or customer emergency contacts on file that are accessible to employees during a crisis is helpful, too.

Getting Legal Help

Starting a small business is both exciting and scary. Business owners must consider and take care of many things to comply with applicable laws and protect themselves from personal liability. An attorney can also be a very helpful resource when starting a business -- especially a high-risk business -- and can help you avoid problems in the future.

We offer a business formation tool that can help you meet the legal requirements to start your business.