Self Employed Web

ASK Priority: Limiting Your Liability

Posted on Saturday, March 11th, 2006 by

QLimiting Your Liability
I operate a small business creating decorative garden fixtures—birdhouses, statues, signs. The items I make—mostly by hand—are completely ornamental. No one eats, stands or sits on my products. Do I need liability insurance?
—KL, Sunbury, PA.

A. Though the nature of your products might seem innocuous, every company is susceptible to product litigation. People often use products in ways they were never intended, and if they are injured doing so, they may choose to litigate. Moreover, the materials used in your products could become a source of litigation if they are consumed by children or family pets. Additionally, liability insurance protects you in the event someone is injured on the premises from which your business operates.

Business liability insurance offers protection not only for the business, but for the owner. Though it is commonly believed that the owners of incorporated companies or limited liability companies (LLC), are protected from judgments against their businesses, that isn’t completely true. If the business owner operates his or her business in tandem with their personal finances, for example, personally guaranteeing a loan for the business, or infusing or withdrawing money from the business, courts may attach the judgment to the business owner’s personal assets as well as the company’s.

There are three main types of business liability insurance. Product liability insurance covers personal injuries or property damage resulting from the use of a product. Professional liability insurance is aimed at businesses offering specific services—medical, legal, clerical, etc.—and covers liability arising from mistakes made in the performance of those services. General liability insurance covers claims arising from personal injury, advertising and property damage.

You can determine the sort of insurance coverage that best suits your business by consulting a commercial insurance broker. Alternately, you can seek out similar businesses in your area and learn what sort of coverage they possess. Local business groups or associations are also useful venues, since they can put you in contact with insurance professionals and consultants.

QWho Needs a Trademark?
My husband and I started a small company to make traditional Native American moccasins. The business has grown over the years and now we sell the moccasins in a number of large retailers throughout our state and on the Internet under our own brand name. Do we need to trademark the name? And how do we go about obtaining a trademark?
—HE, Effingham, IL.

A.Trademarks (TM) are essentially brand names, denoting a specific company’s product or simply the company itself. A trademark can be word or phrase or symbol. Related to trademarks are service marks (SM), which are symbols that identify a particular service offered by a specific company. Established firms often regard their trademarks among their most valued assets, since they legally protect their brand name from being used by competitors.

Not to be confused with patents, trademarks do not confer legal protection on the product itself. Other companies can copy the trademarked product, simply not its name or logo. If your product is sufficiently unique, you can prevent others from copying it by seeking a patent or copyright. Family names and geographic names attached to products— Smith Shoes or California Mittens, for instance—are very difficult to trademark unless the products in question have developed a significant consumer base.

Companies seeking to trademark their products can do so at either the state or federal level. State trademark registrations are relatively inexpensive, but generally do not apply beyond the state’s borders, which means that other firms outside the state of registration can use the trademarked name in their own states. Moreover, state trademark registrations usually cover only those parts of the state that comprise the registrants market at the time of registration. Other companies can apply to use the same trademark in parts of the state not covered in the initial trademark registration. Federally registered trademarks are more comprehensive, but harder to obtain.

The U.S. Patent and Trademark Office registers trademarks in two registers, the principal register denoted by the familiar “®” symbol, for trademarks that already enjoy strong consumer recognition, and a supplemental register, for brand names with weaker consumer recognition. To receive federal trademark protection, the product must be sold across state lines. The trademarked symbol or words must appear on the product label, not simply the advertising. Applications can be made for products not currently in the marketplace, but the registration will not be granted until the trademarked product is available to consumers. Federal registration is also significantly more expensive that state registration, but the protection is nationwide. Federal trademark filings must survive the scrutiny of the Patent and Trademark Office and can take as long as 18 months from filing to granting of the registration. More information, including online filing forms, can be found at the U.S Patent and Trademark Office’s web site at

QAvoiding Embezzlement
How can I prevent embezzlement in my office? I run a small manufacturing business with 35 employees—seven of those in the office—and a large number of trade accounts.
—OW, Ogden, Utah

A. In order to prevent any kind of employee theft, the first line of defense is to rigorously screen your new employees. This is particularly essential if the employee is to be given access to company checking accounts, sensitive business records, or incoming cash or checks. Prospective employers should obtain a detailed employment history from candidates for any position, and then check with the former employers to determine if the information provided is factual. If the former employers are no longer in business, ask the candidate for personal references from other employees of the defunct firm who can be contacted to confirm the candidate’s time there. Make sure that a candidate’s resume does not feature any unaccounted for lapses of employment; if it does, ask for an explanation of his or her activities during that time. Many companies recruit outside firms to conduct criminal background checks on candidates for sensitive positions, though such background checks may be too expensive for some small businesses.

Embezzlers, however, are usually already trusted employees when they decide to steal company funds. With an intimate knowledge of a company’s business and procedures, embezzlers are often able to elude detection for years. The best defense against this is a properly designed accounting system, preferably one created by a certified public accountant from outside your firm. Such an accounting system should fully document each transaction, leaving a traceable paper trail that can be cross-referenced. Periodic audits of your financial records by an outside accountant can often detect financial misappropriations within the firm.

Separating job responsibilities among your employees may also help reduce the risk of embezzlement. Employees who receive checks or cash from customers should not be the same employee charged with entering those payments into the financial records. No one employee should have control of the company’s financial transactions. Personally reviewing all invoices, payroll and expense records, and bank statements also offers some protection.

Some businesses have companyrelated mail sent to a post office box, accessible only by the owner or a designated employee. This ensures that only authorized personnel have access to incoming payments and financial documents, and that those payments can be recorded immediately.

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