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Got It Covered?

Make no mistake - liability insurance is important from the very beginning.

Q: We're thinking about marketing videotapes on CD-ROM, a very simple product. At what point do we need product liability insurance, and at what point do we need to incorporate to protect ourselves?

A: A small business should acquire insurance from the beginning. Because lawsuits are filed against small businesses every day, talk to a knowledgeable insurance agent immediately. Companies that wait until they attain success to acquire insurance are making a mistake.

Many entrepreneurs believe they are immune from liability if they form a corporation or an LLC. That is not the case: Business owners are still liable for their individual acts of negligence. That's why the one-two combination of forming a corporation or LLC and acquiring insurance is so important.

Q: I am at that stage where I would like to incorporate my business. It seems there are hundreds of companies that will do this for you online or by phone. Is this approach advisable?

Brian Wright
Wright Side Up
Via e-mail

A: There are advantages and disadvantages to incorporating over the telephone or online. It's cheap and convenient, but as with most products and services, you get what you pay for.

Especially for businesses with more than one owner (or the potential for more than one owner in later years), organizing a business is a relatively complex process. Filing the appropriate documents with the state is easy, but determining what goes into the document is more difficult. Complex questions about limitations on transfer of stock, resolution of disputes between owners, retirement provisions and appropriate tax planning require more than filling in the blanks.

Likewise, it is no longer clear that incorporation is always appropriate. For many small businesses, operating as a limited liability company (LLC) is a better idea. LLCs combine the flexibility of a partnership with the liability protection of a corporation. (See "Tax Talk" for more on LLCs.) Whomever is on the other end of the phone may ask you the questions needed to incorporate your business but not the questions a lawyer might ask about whether incorporation is the right step for you.

Finally, find out who will be responsible if anything goes wrong with the process--if you run into legal troubles later because of the wording of your low-budget incorporation document. A good attorney will work hard to prevent problems in the first place.

Q: I've heard there are computer programs designed to help you create your own legal documents. How dangerous is it to be your own lawyer?

A: There is a lot a small-business owner can do to act more effectively in the legal arena. Many fine publications available in bookstores provide the basics about small-business law, so you know what issues to raise and what questions to ask. It is difficult and dangerous, however, to draft complex documents without the aid of a lawyer. There is no secret to drafting basic bills of sale and simple collection letters, but when the matter is more complex, with numerous forms to fill in, call a lawyer.

Q: I have a homebased business selling tomato sauces and Italian food products. What kinds of legal issues should I be concerned about?

A: There are many liability issues with respect to selling food products. For more information, you should contact your local department of health. Small businesses, even homebased ones, are highly regulated if their business involves the preparation of food. Second, insurance is critical in the event of contamination. Even assuming your kitchen is clean, accidents can happen.

Q: I presently hold a trademark in Illinois. After receiving the trademark, I found that another company is also using that name. Do I have any recourse?

A: You may well have recourse. Consult an attorney experienced in the field of intellectual property law, which includes patents, trademarks and copyrights. Sometimes a letter from the attorney stating that you hold the trademark is enough to get the other company to change. However, if the other company has been using the name for years, you may be in for a legal battle.

Trademarks are most effective when they are registered at both the federal and state levels. It could be that someone in another state has registered the trademark in that state. In that case, the law will look at who used the trademark first. We urge you to register your trademark at the federal level so you have national protection.

Q: If you are doing business from your home, with clients coming and going, does your homeowner's policy protect you?

A: Your homeowner's policy may not cover your homebased business. In fact, most homeowner policies have exemptions for business activities conducted in the home. Talk with your insurance agent about special small-business packages.

Q: I'm a graphic designer. When I create a piece of art on the computer, does the client only own the materials produced from the digital art and not the actual digital art?

A: The law is very unclear as to who owns this design. Because it's a joint product between you (as the designer) and the client, who often provides the content, it's critical to have a contract. Come to an agreement with your client before you begin work as to who will own what, and get your agreement in writing.


Steven C. Bahls, dean of Capital University Law School in Columbus, Ohio, teaches entrepreneurship law. Freelance writer Jane Easter Bahls specializes in business and legal topics.

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This article was originally published in the February 1998 print edition of Entrepreneur with the headline: Got It Covered?.

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