What freelancers should know about liability and their assets

get adequate business insuranceFrom Mashable, Nellie Akalp provides excellent advice for freelancers and independent contractors on protecting their assets.  It is vital for independent contractors to have adequate liability insurance. I spoke with an attorney who was a strong advocate of attorneys buying malpractice insurance not only to protect themselves but also to protect their clients in the unlikely event the attorneys made a mistake.  Nellie writes:

Two kinds of liability: Contractual and personal

Without delving too deeply into legal 101, there’s an important difference between personal tort liability (caused by your own negligence or actions) and contractual liability (not holding up your end of a contract). If you fail to deliver a project to a client, this can be a matter of contractual liability. If you are negligent and send plagiarized work to a client or cause a car accident by driving poorly, these most likely fall under personal tort liability.

Many small business owners and independent workers think that by creating a formal company, they can protect themselves from all personal liability. When you create a formal business entity (i.e. corporation or LLC), you do put some separation between your personal assets and the business. When you create a formal business entity (i.e. corporation or LLC), you do put some separation between your personal assets and the business. Your business now exists as a separate entity.

However, an LLC or corporation typically protects the business owner from being personally responsible for contractual liability, but not personal liability. In other words, if your own actions injure someone or cause some other kind of damage, you can still be personally liable. And this is true whether or not you have incorporated your business.

This difference is really important for independent workers and solo business providers. When you’re an independent worker, you don’t have any employees — meaning that all the work you deliver can fall under the realm of your personal actions.

So, how should solo workers protect themselves?

If you’re concerned that being sued for a part-time gig will wipe out your personal bank account, here are a few suggestions:

1.  Form an LLC/corporation: Yes, as mentioned above, this step won’t protect you from personal liability, but it will protect against contractual liability. If you ever hire an employee or contractor, a formal business structure can protect you personally from your employees’ actions. It can also offer flexibility in terms of how you pay your taxes and classify your income (you can talk with a tax advisor/CPA about the possibilities).

2. Get adequate business insurance: Ideally, you should consult with an insurance agent who’s familiar with your business type and particulars. Many small businesses take out general commercial liability insurance to protect against accidents, injuries and negligence claims. For example, it can help cover expenses if someone gets hurt on your property (i.e. a client comes over to review something) or against a claim of slander, false advertising or copyright infringement. Depending on your level of coverage, you can expect to pay between $500-$1,000 annually.

There’s also an E&O (Errors and Omissions) policy that covers any errors, oversight or negligence in your work. Professional service providers — like lawyers, doctors or accountants — will need to get some kind of professional liability insurance to protect against claims of malpractice and negligence…

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