What UberX and Lyft Drivers Can Do to Minimize Their Personal Liability The independent status of those behind the wheel raises a sticky issue.

By Nellie Akalp

Opinions expressed by Entrepreneur contributors are their own.

Uber | Lyft

Peer-to-peer startups like Airbnb, TaskRabbit, Uber and Lyft are transforming traditional business models.

The heavy battle between old and new is playing out right now in the car service industry. Ride-sharing startups such as Uber, Lyft and Sidecar use a smartphone app to connect people who need a ride with drivers. It's cheaper, faster and more user-friendly than the traditional taxi service, and offers an easy way to get a quick ride in areas that aren't always served by taxis.

Unlike taxi drivers, drivers on UberX, Lyft and Sidecar's platforms are considered independent contractors. According to the startups, their apps simply match up a contractor available for a job with a customer willing to pay for the service. Drivers are responsible for paying any on-the-job costs like gas and vehicle maintenance, and they don't receive any benefits.

But the independent status of drivers raises the question of liability, which is quickly becoming a sticky issue for UberX and Lyft drivers, along with any of the other part-time, freelance service jobs emerging in this "sharing economy."

We all accept a certain degree of risk when we get behind the wheel. By nature of their jobs, ride-share drivers are behind the wheel with much more frequency than the rest of us, increasing their risk. Then, there's a matter of insurance. Commercial livery insurance can be prohibitively expensive for the part-time UberX driver who takes on a handful of gigs per day or week. But personal policies from the major insurance providers won't cover ride-share drivers.

Related: How Patience and Good Timing Paid Off for This Super Hot Startup

Generally speaking, contractors and small business owners are advised to set up a corporation or LLC (limited liability company) to minimize their personal liability. This type of legal business entity separates the business owner from the business -- known in the legal industry as "the corporate veil." Should a business be sued, the business owner's personal assets are shielded from the judgment.

However, there's a misconception that forming an LLC or corporation will automatically protect you in all circumstances. And this just isn't the case. As a business owner, you're still responsible for your own personal actions -- this is true whether your business is a corporation or sole proprietorship. If you are negligent (i.e. didn't drive your car safely and caused an accident), you're personally liable for this conduct.

There's an important difference between personal tort liability (causing a car accident) and contractual liability (not holding up your end of a contract). An LLC or corporation can protect the business owner from being personally responsible for contractual liability matters but not tort.

Faced with this set of circumstances, what's an Uber, Lyft or Sidecar driver to do? How can they make sure a part-time gig for extra money doesn't end up costing them everything they have?

At present, a two-pronged approach is most prudent: first setting up a legal business structure and then getting adequate insurance. While a legal business structure won't protect against personal negligence/torts, it will provide some layer of protection for the driver/business owner in other situations.

Related: The Sharing Economy Is Taking Off: Get On the Rocket or Risk Being Left Behind

When it comes to business structures, the LLC is often the best choice for contractors and small-business owners as it doesn't involve the administrative/paperwork burden of a corporation. Whether you choose an LLC or corporation, it's typically best to elect S Corporation tax status, meaning that business profits are reported on your personal tax return, rather than reported by the business itself.

Insurance is a more complicated matter, as anyone who drives for UberX, Lyft or Sidecar is well aware. The biggest sticking point is "Period 1," the period of time when a driver has turned on the smartphone app to indicate they're available but hasn't yet received a request.

The ride service companies' own insurance policies don't kick in until the driver is en route to pick up a passenger. You can read each of the companies' policies here: Uber, Lyft and Sidecar. Yet many UberX/Lyft drivers are finding their personal insurance policy won't cover them if they're involved in for-hire driving.

Hybrid policies are on their way to cover ride-service drivers during this Period 1 time when they're waiting for a ride request. One hybrid policy exists from Erie Insurance, but its availability is limited to a handful of states. At least five of the major insurance providers are in the process of developing hybrid products. And state legislatures are working to address the insurance gap as well.

The bottom line? Insurance for ride-share drivers is complex, and many drivers are operating under the mindset of "I hope I'm covered." Hopefully, the situation will become much clearer for drivers in the near future, but until then, ride-share drivers should discuss their situation with an experienced insurance agent and know exactly what their coverage is at all times: when the app is turned off, when the app is turned on but they're waiting for a request, when a request comes in, and when they have a passenger in the car.

The most comprehensive solution involves forming a limited liability entity (i.e. LLC) coupled with adequate insurance. That way, a part-time gig won't end up risking hard-earned personal assets.

Related: Sailo Wants to Be Your Airbnb for Yachting

Wavy Line
Nellie Akalp

Entrepreneur Leadership Network Contributor

CEO of CorpNet.com

Nellie Akalp is a passionate entrepreneur and mother of four. She is the CEO of CorpNet.com, a trusted resource and service provider for business incorporation, LLC filings, corporate compliance and payroll tax registration services. 

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