Protecting Yourself, Your Assets and the Assets of your Business
Are you in the business of providing professional services to clients?
If so, then you should consider the business you operate, the structure under which you operate your business, the professional services you provide and the risks and liabilities associated with this.
If you have assets in your personal name (e.g. a house property) and you are operating your business in your own name (i.e. as a sole trader or in an unincorporated (non-company) partnership) then your personal assets are at risk if you cannot meet a business liability, including a client successfully suing you for negligence in respect to the professional services which you have provided.
Your Business Structure
In setting up your business and thereafter, you should consider and review what structure you use.
Your options are:
sole trade or unincorporated (non-company) partnership - you are personally liable for debts of the business
company (sometimes also with a family trust or unit trust) - you personally are generally not liable for the debts of the business - unless you have agreed to be liable for a debt/liability e.g. by signing a personal guarantee in relation to that debt/liability
In deciding what structure to use for your business you should consult your solicitor and accountant.
The issues to consider are risk management (what assets do you have and are they being exposed to a business debt/liability; what advice are you giving and what is the likelihood of things going wrong and you being sued) and tax and accounting issues plus the costs to set up the structure and the ongoing compliance costs of having and operating the structure.
It is important to determine your issues and make a decision that you understand and that works for you.
As your situation may change over time, it is good to review this from time to time and alter the structure if necessary.
Professional Indemnity Insurance
If you provide professional services, you should also seriously consider taking out professional indemnity insurance to cover the risk of being sued by a client for negligent advice or services provided.
The premiums for professional indemnity insurance cover are significant. But you need to weigh up the risk of not having the cover together with the cost of taking it out and the benefits of having it.
Some professions have a legal requirement that people in that profession have professional indemnity insurance (e.g. solicitors).
Some of your clients may insist as part of their contractual arrangement with your business that you have professional indemnity insurance cover and provide evidence of this cover to them. This is a 'safety net' for the client - to know that if something goes wrong then they can make a claim under your professional indemnity insurance policy and, if successful, be able realise that claim from the insurance cover and not only have to rely on being able to recover from whatever assets you have in your business (and depending on your business set up - see comments above) your personal assets.
Professional indemnity insurance is a business expense. If you have it then you should factor its cost in to the cost of the services that you provide.
If you cease to provide professional services then you should ensure that you understand:
a client may make a claim against you several years after the alleged problem arose
what your policy provides as to the cover you will receive and for what period. If the policy only applies if you have cover in the year the claim is made then you need to ensure that you continue your cover after you cease work for an appropriate period of time. You should carefully consider what possible claims there may be, the possible amounts of those claims and how long you need to ensure you have ongoing cover for; then discuss it with your insurer. You may also wish to consult your solicitor and accountant.
If something goes wrong in your provision of professional services to a client and your client is not happy, or worse wants to sue you, then what are your options?
It is always best - if you can - to resolve the matter with your client. This enables you to deal with your relationship with the client - whether it is ongoing or not. The aim is to minimise the risk of adverse comments or publicity about your alleged work, which could have a negative impact on your business. It can also minimise or avoid the time cost and stress of resolving the matter legally. Disputes and litigation take your focus away from your business and your clients.
Make sure you have assessed your business risks and structured your business to minimise them.
Professional Indemnity Insurance is arguably something that you cannot afford not to have in your business.
We live in an increasingly litigious world and it is important to protect the assets which we have worked hard to acquire.
This article is general in nature
and for information only. It should not be acted upon without obtaining
specific legal advice.
©Anne Hodgson & Co Lawyers,
Tel: 03 9578 7444 Fax: 03 8677 2962 Email: firstname.lastname@example.org