Legal Question in Business Law in California

I currently own a small aquarium store with a partner. Profits have been growing steadily for the past year and we are now looking at moving into the aquarium maintenance business as well. However, we're worried about the liability if something goes wrong whether or not it's actually our fault. With time, any aquarium will develop a leak and we don't want to be blamed for old age. At the same time, we want to be protected against gross negligence in case we accidentally break a glass tank or something like that. We don't foresee anything like this happening anytime soon, but you never really know and when dealing with some tanks that are a thousand gallons or more, we don't want to learn any lessons the hard way.

Gross income looks like it will come out to be around $20,000 after our first year of business and if the market continues to expand in our area like it has been, and if we get into the maintenance business, we're projecting an income of $50,000 - $60,000 next year.

My question is, what would be the best way to protect ourselves and our investment? Insurance companies are extremely hesitant to insure an aquarium maintenance company. The ones who will insure us want $800 - $1,000 per year for $1,000,000 worth of liability insurance which seems reasonable, but I'm worried about if they'll have some loophole to get out of paying when the day comes that we need them. Our other thought is to form an S-Corp so that if something did happen, we may lose the business depending on the severity of the damage, but hopefully our personal assets would be protected. I'm not sure if that's the case or if clients could still come after us personally even if we had a corporation. What would be the best way to protect ourselves on the off-chance that something went terribly wrong at one of our maintenance jobs?


Asked on 7/19/10, 8:39 pm

2 Answers from Attorneys

The only way to be totally safe is both. If opting for one or the other, I'd go with insurance. Maintaining the proper corporate formalities, and adequately captializing the corporation, and keeping enough assets in the corporation to answer for its potential liabilities is nearly impossible with an annual budget the size you mention. And if you don't, plaintiffs can pierce the corporation and get your assets anyway. The only way around keeping cash in the business is to insure. That satisfies the fiscal responsibility issue for insurable debts. You still have to have annual shareholder meetings, minutes, resolutions, etc. And formally put yourselves on a payroll rather than using the business account as an ATM. And all the other things you have to do to maintain an actual corporation, but at least you won't have to dump a bunch of cash into the business and leave it there.

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Answered on 7/20/10, 12:10 am
Bryan Whipple Bryan R. R. Whipple, Attorney at Law

I agree. You need to do four things: (1) Incorporate (or form an LLC); (2) Insure; (3) Write up and use a standard contract that contains a carefully-designed limited warranty that is both fair to the customer and protects you from stale claims; and (4) keep yourselves and your employees well trained on the best practices, and make sure every job gets the full advantage of the training and practices.

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Answered on 7/20/10, 9:02 am


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