Business liability: insurance and/or incorporation? And where?

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Topic Author
Uncle Morris
Posts: 197
Joined: Sun Jul 12, 2020 8:13 pm

Business liability: insurance and/or incorporation? And where?

Post by Uncle Morris »

DW has a niche online tutoring business. Sole proprietor.

She's thinking of expanding to hire tutors besides herself.

The students (mostly children, some adults) and the tutors can be anywhere, but are mostly in the US. We're not (expat Americans, with assets mostly in the US). Tutors will be independent contractors.

To protect against liability claims, in addition to having tutors get criminal background checks, should we...

a) buy liability insurance in the US?
b) buy liability insurance in our country of residence?
c) incorporate in the US? (Our country of residence taxes LLCs as regular corporations, so there would be double taxation)
d) incorporate in our country of residence? (Lower corp tax rate than personal)
e) some combination of the above?

Insurance is easy to buy. Creating corporations is a lot more work, yes?

Thanks.
mcraepat9
Posts: 1827
Joined: Thu Jul 16, 2015 11:46 am

Re: Business liability: insurance and/or incorporation? And where?

Post by mcraepat9 »

Uncle Morris wrote: Thu Jun 24, 2021 3:17 pm DW has a niche online tutoring business. Sole proprietor.

She's thinking of expanding to hire tutors besides herself.

The students (mostly children, some adults) and the tutors can be anywhere, but are mostly in the US. We're not (expat Americans, with assets mostly in the US). Tutors will be independent contractors.How did you determine that the tutors would be independent contractors? Sounds like a misclassification to me based on how most tutoring businesses operate.

To protect against liability claims, in addition to having tutors get criminal background checks, should we...

a) buy liability insurance in the US? Yes definitely
b) buy liability insurance in our country of residence? Probably not necessary.
c) incorporate in the US? (Our country of residence taxes LLCs as regular corporations, so there would be double taxation) Consult legal counsel on this - this is a common problem for Canadians who form US LLCs
d) incorporate in our country of residence? (Lower corp tax rate than personal) Again, need to consult counsel with cross-border experience
e) some combination of the above?

Insurance is easy to buy. Creating corporations is a lot more work, yes?

Thanks.
Short answer is you need to hire competent legal counsel that has experience with cross-border businesses with the US and your home country.
I find it very hard to believe that this business could be done with independent contractors, but again counsel will give you guidance on how to do that correctly within the bounds of the law.
Amateur investors are not cool-headed logicians.
Topic Author
Uncle Morris
Posts: 197
Joined: Sun Jul 12, 2020 8:13 pm

Re: Business liability: insurance and/or incorporation? And where?

Post by Uncle Morris »

Thanks, mcraepat9!
mcraepat9 wrote: Thu Jun 24, 2021 4:07 pm How did you determine that the tutors would be independent contractors? Sounds like a misclassification to me based on how most tutoring businesses operate.
Mostly because at least at first, they would be very part-time, or even occasional, setting their own schedules, using their own equipment, etc.
To protect against liability claims, in addition to having tutors get criminal background checks, should we...

a) buy liability insurance in the US? Yes definitely
b) buy liability insurance in our country of residence? Probably not necessary.
Is this because (aside from us) most of the people involved would be in the US? If we do form a corporation in our country of residence, would it not be possible to include in the sign-up forms that jurisdiction for any claims would be here, not the US?
mcraepat9
Posts: 1827
Joined: Thu Jul 16, 2015 11:46 am

Re: Business liability: insurance and/or incorporation? And where?

Post by mcraepat9 »

Uncle Morris wrote: Thu Jun 24, 2021 11:39 pm Thanks, mcraepat9!
mcraepat9 wrote: Thu Jun 24, 2021 4:07 pm How did you determine that the tutors would be independent contractors? Sounds like a misclassification to me based on how most tutoring businesses operate.
Mostly because at least at first, they would be very part-time, or even occasional, setting their own schedules, using their own equipment, etc.
To protect against liability claims, in addition to having tutors get criminal background checks, should we...

a) buy liability insurance in the US? Yes definitely
b) buy liability insurance in our country of residence? Probably not necessary.
Is this because (aside from us) most of the people involved would be in the US? If we do form a corporation in our country of residence, would it not be possible to include in the sign-up forms that jurisdiction for any claims would be here, not the US?
Re classification issue - understand your view but really need to look closely at this. I can count on zero hands how many businesses I work with that have teenagers (not adults) that genuinely qualify as "independent contractors" under federal and state labor laws. You know the facts better than anyone on the internet can, but i would urge you to speak to counsel about this to stay on the right side of the law here.

Re insurance - when assessing liability risks for a business, you generally focus on the locations where the potential damages occur. If all the students/customers are in the US, what sort of claim would arise in your home country that would not otherwise be covered by your US policy? A parent in the US is going to sue you and litigate in your home country? If you are in Canada (which i am guessing based on the double taxation comment), most US insurers will insist on separate policies for Canadian claims, i don't know the specifics as to why this is the case. Obviously ask your liability insurance broker, but seems like a huge stretch to imagine substantial risk in your home country.
Amateur investors are not cool-headed logicians.
Topic Author
Uncle Morris
Posts: 197
Joined: Sun Jul 12, 2020 8:13 pm

Re: Business liability: insurance and/or incorporation? And where?

Post by Uncle Morris »

Thanks again - very helpful.

I've already had one conversation with a tax lawyer, and have another scheduled with a cross-border accountant. That should help with the decisions about structure and where to locate a corporation if that's what we end up doing.

I guess the bigger question, stepping back a bit, is how to mitigate liability risk. I did search other threads here, and found some that suggested that incorporating doesn't always mitigate liability, depending on circumstances. I suppose it's a lot easier just to go out and buy more insurance. What I'm trying to understand is how much incorporating adds to the liability risk mitigation.
mcraepat9
Posts: 1827
Joined: Thu Jul 16, 2015 11:46 am

Re: Business liability: insurance and/or incorporation? And where?

Post by mcraepat9 »

Uncle Morris wrote: Sun Jun 27, 2021 2:09 pm Thanks again - very helpful.

I've already had one conversation with a tax lawyer, and have another scheduled with a cross-border accountant. That should help with the decisions about structure and where to locate a corporation if that's what we end up doing.

I guess the bigger question, stepping back a bit, is how to mitigate liability risk. I did search other threads here, and found some that suggested that incorporating doesn't always mitigate liability, depending on circumstances. I suppose it's a lot easier just to go out and buy more insurance. What I'm trying to understand is how much incorporating adds to the liability risk mitigation.
Re liability risk - most of the posts you are referencing are just pointing out that forming a legal entity to conduct your own business typically does not protect you from torts you commit yourself (especially for licensed professionals - for example, a doctor cannot use a legal entity to evade a medical malpractice suit). This is why, for many sole proprietorship businesses without employees, forming a corporation or LLC for the business does very little to protect those business owners personally.

This is very facts and circumstances based. Again, counsel will be able to give you the most accurate and practical advice based on the unique attributes of your business and its employees/contractors.
Amateur investors are not cool-headed logicians.
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