Business Liabilities Every Small Business Owner Should Always Remember

Business Liabilities Every Small Business Owner Should Always Remember

Next Insurance Staff
By Next Insurance Staff
Apr 11, 2019
6 min read
Running your own business can be such a juggling act. There are so many responsibilities to take into consideration: finding the right location, having the right paperwork and finding an effective strategy to reach your target clientele, to name a few. Most important, though, is making sure your business is financially viable. If you're in the advanced stages of developing your business or are already running one, you've probably drawn up a budget to track your income and expenses. But have you thought about your liabilities? The word "liability" tends to have a negative connotation when used in day-to-day conversation, meaning something that poses risk. But in a business context, the word has a different meaning.

What Are Liabilities in Business?

According to the International Financial Reporting Standards (IFRS) Framework, "A liability is a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits." In other words, a business liability is a financial or legal obligation or responsibility--a payment you are expected to make or a service you are expected to provide and haven't yet. All businesses have liabilities--you can't run a business without them! Here are a few different types of liabilities in business:

Accounting Liabilities

Accounting liabilities are sometimes referred to as payables. They include various kinds of financial obligations your company may have, including: Short-term or current liabilities: These include liabilities that you will need to pay within the upcoming year. This type of liability includes payments such as bills, salaries for your employees, sales taxes, payroll taxes, short-term loans, bank account overdrafts and other types of contracts that require you to make a payment later on. This category also includes services a customer may have prepaid for that you haven't provided yet, or deposits they've made for a service you haven't completed, also known as unearned revenue. Long-term or non-current liabilities: These are liabilities that you will need to pay over the long term (longer than a year). This may include long-term loans, capital assets that take a while to pay back, mortgages, deferred taxes, bonds, long-term leases, and more. Contingent liabilities: While the above two types of liabilities are payments your company will definitely need to make in the future, contingent liabilities include payments you might need to make in the future, but might not. These might include things like warranties--the promise to replace a product or provide additional service for free in case the customer is unsatisfied. You should have enough confidence in your product or service to be sure you won't need to fill warranties very often, but if you do offer this option, you'll need to take into account that customers will occasionally need to take advantage of it. Another type of contingent liability includes legal liabilities.

Legal Business Liabilities

No matter how carefully you run your business, there's always a chance that something won't go as planned and a customer will sue you for damages. This is a contingent liability because it's something you may be required to pay, but might not, depending on the outcome of the lawsuit. Here are some of the legal liabilities a small business might face:

Accidents & Injuries

Suppose you run a home day care, and when one of the moms drops off her kid, she trips and falls on your front steps and breaks a wrist. It was definitely not your fault, but she still may claim that your business is responsible and want you to cover her medical expenses.

Property Damage

If you are a contract worker, you are being tasked with improving or otherwise handling other people's property all the time. Things happen. Maybe you accidentally knocked over a paint can and ruined an expensive carpet. The owner will want to be compensated for the ruined property.


Reputation is extremely important when it comes to running a business, because customers want to hire someone they've heard only good things about. Someone might cause damage to your reputation by spreading unsavory information about you, or you might accidentally let something slip about a competitor.

Intellectual Property

Say you're a yoga instructor who's recorded a series of instructional videos to post to YouTube, and you found this perfect piece of music to use in the background... but you forgot to ask permission to use it. The artist might discover it and sue you for copyright infringement.

Negligence, Errors & Omissions

To err is human. You do your best, but there's always a chance that something will go wrong and your client will claim that you made a professional error or omission, or were otherwise negligent. This can include legal violations; sometimes licensing and regulations are complicated, and something might slip past you. Maybe you forgot to take your company vehicle in for its required regular tests, and it malfunctions and causes an accident.

Harm to Employees

The well-being of your employees is surely important to you, but although you train and prepare them and take every precaution, who knows what might happen on the job. But don't worry--there's a way to protect your business from suffering damage from these liabilities. Running a Small Business

Small Business Liability Insurance

The best way to prevent problems with liability is to get liability insurance for business owners. Insurance provides a safety net, ensuring that you can stay focused on growing your business instead of worrying about what might go wrong.

What Does Business Liability Insurance Cover?

There are many different types of liability insurance. The most basic level is general liability insurance; this generally covers the first four of the legal liabilities listed above: accidents that result in harm to a third party, including injuries, other kinds of harm (such as to reputation or intellectual property), and property damage. Another kind of business liability insurance is professional liability insurance, which adds additional coverage in cases of professional errors and negligence.

Other Benefits of Liability Insurance

Aside from keeping you covered in cases where there's a problem, having business insurance has the added benefit of showing your customers that you take your job--and their well-being--very seriously. In some cases, you may be legally required to have some level of insurance, but if you don't, having insurance gives you a significant edge on your competition. Your clients will know that you've taken every precaution to ensure that they're taken care of.
Business Liabilities Every Small Business Owner Should Always Remember


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NEXT’s mission is to help entrepreneurs thrive.

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We want to make sure you have all of the information you need to make an informed decisions about purchasing business insurance. We hope you’ll find this information helpful.

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