Managing Risk and Liability as a Sole Trader

Sometimes, things go wrong. No matter what your business does, or what industry you operate in, you’ll face many types of risk in your day-to-day operations as sole trader. We covered how to manage your business in slow economic times. Unfortunately, some mistakes can destroy a business, and others can cause significant impact that is costly and disruptive to manage.

Why is it important to manage risk and liability?

When you compare a sole proprietorship to a standard company structure, there are some major differences in the way business liability is handled in the event of a negative incident. According to the Australian Government’s Support for businesses in Australia | business.gov.au guidance, sole traders are personally and legally responsible for all aspects of their businesses, including any debts, losses and day-to-day business decisions. What this means is that you as an individual have unlimited liability, and your personal assets are at risk if things go wrong. This differs from a standard company structure which protects owners against personal liability (as this kind of business is a separate legal entity from it’s management).

How can I manage business risk?

While this sounds (and is) a serious concern when you operate as a sole trader, there are established methods of managing your potential liabilities as a sole trader.

  • Identify your risks: Every business is unique, and every business will face different risks where things can go wrong. It’s important to consider the ‘big rocks’ that you can identify and work around that might ruin your business. Consider ‘what could go wrong?’. If you work in an industry that is is publicly facing (tradies and construction workers for example), is it possible that your mistakes may cause physical or financial harm to others? Do you provide advice to others that, if it is not accurate, could lead to someone’s life being negatively impacted? It’s important to take a step back and look at the bigger picture in which you business operates to start to understand where things might go wrong.

  • Create a risk management plan: Having identified your risks, you should ensure you have a plan in place to help minimise your business’ exposure in it’s day-to-day operations. Your plan should consider how you can prevent risks from occurring. Consider how you can make things safer in your business:

    • Can you install rubber mats on the floor of your cafe to prevent customers slipping over?

    • Will you install alarms on your premises to prevent stolen assets?

    • Are you able to document an incident response plan to quickly react and reduce harm in the event of an emergency?

  • Reduce and control your risks with insurance: The most common way to protect your business is to consider the right insurance that protect your operations, customers and your income from unexpected events. There are several different kinds of insurance that can protect your business, and there are few options that will holistically protect your operations, so it’s very important to consult a professional business advisor when taking out a new policy. There are many types of insurance that can be considered depending on your business, and some of these are listed out below:

    • Public and Products Liability Insurance: This type of cover is useful for any business that deals with members of the public. This insurance may help to protect your business in the event that your actions cause harm, serious injury or death to members of the public. In the event that an unexpected event occurs and someone is hurt or if their property is destroyed or damaged, this type of cover may protect you.

    • Professional Indemnity Insurance: If your business involves providing advice or professional services, there is a chance that you may accidentally provide incorrect information or services that result in a negative impacts on your customers. This type of insurance may protect your business from legal expenses or compensation costs.

    • Business Interruption Insurance: This type of cover may protect your business in the event that you are unable to operate your normal business, potentially due to property that is lost or damaged after a catastrophic event. Most businesses will have on-going expenses that will need to be paid, regardless of whether you are generating revenue. This insurance may cover your costs and keep your business running so you can recover and rebuild.

    • Cyber liability Insurance: If your business collects, holds or handles sensitive customer data, it could be important to consider cyber insurance. This type of cover is designed to help protect you from claims and support your business in the event of a cyber breach or attack.

Some insurers may provide insurance packages that are specifically tailored for different kinds of business operations. These packages may be more comprehensive and cheaper overall than taking out separate insurance policies.

Useful Resources:

Disclaimer:

All information above is general in nature, and doesn’t take any specific consideration about your business into account. Consult with a professional business advisor when considering your needs.

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