How can a business reduce its liability?

Reducing business liability doesn’t have to be complicated. Here are some simple tips on how you can reduce your business liability.

What is liability in business?

Liability is the risk of any sort of loss from your business, most commonly money and debts. 

This could also be loss that occurs due to risk, negligence and even unforeseen circumstances (like a global pandemic). 

Common types of loss from businesses include:

1. **Business failure**. This is the most common cause of bankruptcy. While the risk of loss is greatest in the first years of operation, it can happen any time.

2. **Inadequate insurance**. This means not getting insurance at all, or not getting enough insurance to cover your operations and relationships.

3. **Insufficient management**. Not getting the right help and expertise to drive the business forward.

4. **Inappropriate use of credit**. Using credit when you don’t need it, and not paying it back on time so you accrue interest.

5. **Poor accounting**. This means keeping good records, and using those records to make good decisions.

6. **Bad contracts**. This means writing contracts that protect your interests

7. **Bad technology**. This means using equipment that breaks down, or software that isn’t updated.

8. **Bad location**. This means choosing the wrong location, or one that your business can’t grow fast enough in.

9. **Bad timing**. This means entering the market at the wrong time, or moving into a new industry when everyone expects the old one to go out of business.

11. **Bad luck**. This means things happening that no one could reasonably have expected.

According to thebalancesmb.com, liabilities are the amounts owed by a business at any one time. 

Create a plan of attack

Business plans are useful for a number of reasons. 

The idea behind a business plan is that it will be easier to calculate the risks associated with your strategy, as well as identifying your goals and the steps you need to take to achieve them.

A business plan is a detailed plan for starting a business or expanding an existing business. It typically includes a description of the business, its objectives, the management team, a marketing plan and a financial plan.

A business plan can help you and potential investors to understand your business better. 

It allows you to clearly identify your strengths and weaknesses, and your short-term and long-term goals.

A business plan can also help you to plan for the future. It helps you to project what your business will look like in the future, and it helps you to plan for potential problems.

A business plan can help venture capitalists and banks to decide whether to lend you money.

Find the right business structure

You have a number of choices. You could set up a limited company, partnership, be a a sole trader or enter into a limited liability partnership

Which to choose?

Limited companies can be set up by anyone and you’ll pay a tax on profits. 

Partnerships can be set up by two or more people.

Sole traders can be set up by one person.

Limited liability partnerships involve each partner putting an amount of money into the business and then the liability is limited to the amount that they invest. 

Get the right insurance

Insurance is an agreement between a business and an insurance company, giving the business certain guarantees against loss. The insurance company takes out a claim, pays the claim, then collects from the business a sum of money (called the premium).

Suppose your business produces widgets. You can insure against the loss of widgets, that is, against cases where some widgets are lost, rather than sold. When you insure, you tell the insurance that you agree to pay a certain sum (the premium) if widgets are lost. So if your business is insured, and your widgets are lost, the insurance company pays you the agreed amount.

Create business contracts

A business contract is an agreement between two parties, for example you and a supplier. 

Business contracts are a bit like marriage vows: they describe what each party expects. 

This is a good thing. 

Business contracts often include some way of fixing mistakes and clauses that explain what happens if a party does not fulfil their duties. 

According to crestlegal.com business contracts can also contain clauses known as “force majeure” that can account for unforeseen circumstances such as a pandemic.

A Force Majeure Clause (FMC) is a clause that sets out the rules which apply, if an event outside the control of the parties to a contract, stops a contract being carried out.

A clause of this type is common in commercial contracts. For example, it may be included in contracts with suppliers, or, in the case of construction contracts, with builders.

A force majeure event is any circumstance or event that is outside the control and influence of a party to the contract, and which prevents that party from performing its obligations.

Examples of force majeure events include war, civil unrest, terrorism, strike action, supply shortages, accidents and natural disasters (as well as pandemics).

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