Releasing Liability: What You Should Know Before Your Business Uses a Release of Liability

Some activities are inherently risky. Visitors of certain types of businesses, such as shooting ranges, equestrian centers, and sky diving know there is a chance they could get injured when they engage in the activities those businesses offer. To protect themselves against potentially costly lawsuits, businesses can use a liability waiver to shift the risk from themselves to their customers.

Liability waivers are a type of contractual provision in which one party agrees not to hold the other party legally responsible for a set of acknowledged risks. Businesses may ask customers to sign a liability waiver saying that they will not sue for damages if they are injured on the business owner’s premises.
Courts have generally found liability waivers to be enforceable, but they are not a silver bullet. If you ask your customers to sign away their right to sue, you must draft a liability waiver that will stand up to scrutiny if tested.

When Is a Liability Waiver Appropriate?

Liability waivers are most commonly used by businesses that offer dangerous activities. “Dangerous” does not have to mean an extreme activity like skydiving, CrossFit, or martial arts, however.

● Most people would not consider getting a massage to be dangerous, but a massage therapist might ask patients to sign a liability waiver in case they aggravate a prior injury when providing treatment.
● Liability waivers may be used if just one part of an activity—or one part of a property—presents risks. A sightseeing tour offered by a tourism company might not be considered very dangerous, but traveling by car or bus to the tour destination carries a risk of injury, so the tourism company might ask guests to sign a liability waiver. Similarly, a homeowners’ association might have a liability waiver pertaining to their recreational facilities, such as pools and workout centers.
● Businesses may require contractors to sign a waiver prior to working on their property.
● Liability waivers can be used in unusual or one-off circumstances that present a risk of injury or illness; for example, during the COVID-19 pandemic, businesses introduced liability waivers in an attempt to preclude lawsuits from people who became ill from contracting the virus at the business’s site.

There is no definitive list of circumstances in which businesses should or should not use a liability waiver.

For practical reasons, not all businesses ask customers to sign liability waivers. Grocery store patrons, for example, could slip and fall on a wet spot and sue the store for their injuries, but they are not asked to sign waivers before shopping. The risk of a slip-and-fall accident is low, and it would require a lot of time and resources to get every shopper to sign a release. It is more practical for grocery stores to clean up spills and use “wet floor” signs when appropriate to mitigate their liability.

On the other hand, if the grocery store has a play area for children to use while their parents shop, the store might ask parents to sign a waiver releasing the store from liability for injuries suffered while using the play area.

Liability waivers are typically not used in an employment context to protect the business against claims arising from work-related injuries. This is because employees cannot sue their employers for injuries, except in very rare cases. Instead, they are compensated by the business’s workers’ compensation insurance. An employer could ask an employee to sign a release that is not related to injury claims, however, such as a release barring legal claims over separation or termination of employment.

Are Liability Waivers Legally Enforceable?

The enforceability of liability waivers is generally a state law matter, and states vary widely in their stance towards these provisions. Some states, including Louisiana and Virginia, consider waivers of liability for physical injury to be unenforceable. Other states have a freedom-of-contract stance and allow liability waivers if they meet a few basic requirements.

To be legally enforceable in states where they may be used, a waiver should meet the following criteria:
● The waiver must be clear and unambiguous. This means that the waiver must clearly specify the types of activities and legal claims it applies to. The waiver should not be overly broad to avoid confusion about its terms. It should also avoid legalese in favor of terms easily understandable by the average person. The customer should be able to understand what they are signing and that they are waiving their rights.
● The waiver should be conspicuous. This means that the liability waiver should be a separate document and should not be buried within a registration form or document that also addresses other matters.
● The waiver should not include intentional, reckless, or grossly negligent conduct. Waivers are designed to provide a liability shield against ordinary negligence (i.e., unintentional conduct or oversight). They are not a get-out-of-jail-free card for companies to engage in wanton irresponsibility. So, while a waiver might protect a company offering hazardous activities against an accidental injury, if the company offers those activities without providing any safety equipment or procedures, a waiver likely would not protect them against claims arising from customers’ injuries that could have been avoided by taking those reasonable precautions.
● The waiver cannot violate state laws or public policy. Not only must liability waivers comply with the law in the state where they are drafted, they also must not violate public policy. For example, a waiver may be determined to be against public policy if one party has substantially less bargaining power, so that the contract puts them at the mercy of the other party’s negligence.
● The waiver should comply with basic contract law principles. Each state has developed a body of case law applicable to liability waivers. In addition to these state-specific rules, basic contract law principles apply to waivers. The business seeking to enforce the waiver must obtain a signature from a customer who has the capacity to enter into the contract and provide sufficient consideration (i.e., something of value). Note that many states will not enforce a liability release signed by a parent on behalf of their minor children, who lack contractual capacity.

In summary, a liability waiver should be as detailed and as clear as possible. It should describe the activity the customer will engage in and its location, list the possible risks and injuries that could arise from that activity, and release the business from negligence to the full extent of the law, without creating a blanket shield against grossly negligent conduct. The names and addresses of the parties must be included, and the waiver must be presented to each individual customer for their signature, as a release that purports to waive liability on behalf of a group is not likely to be enforceable. Above all, have an attorney review the waiver of liability to ensure it complies with applicable state laws and will pass muster if tested in court.

Are You Doing Everything Possible to Protect Your Business?

The decision to have customers sign a liability waiver is usually industry-dependent; but new risks are constantly emerging, and companies must always be prepared to update their mitigation strategy.

Although a liability waiver is not a guarantee against all liability, when well-written, it can be an important part of a company’s risk management strategy. One-size-fits-all online documents that are not tailored to your unique business activities and jurisdiction’s laws could fail a court challenge. For help creating a customized liability waiver designed specifically for your business, contact our office to schedule an appointment.

What Is the Difference between a Trust and an LLC?

Trusts and limited liability companies (LLCs) are both legal vehicles that can be used to manage and protect assets, minimize taxation, and avoid probate.

Whether a trust or an LLC is a better choice may depend on the type of asset, but you do not necessarily have to choose between the two. In fact, an LLC can be placed in a trust. To explain how that works, it is first necessary to better understand each type of entity and clear up some common misconceptions about them.

What Is a Trust?

When most people think of a trust, they think of a vehicle for transferring intergenerational wealth. While this is not too far off the mark, trusts are not exclusively for the wealthy. They are, however, a common way to avoid probate (the legal process of settling an estate when somebody passes away) and plan for estate taxes.

For starters, it is not just money that can be placed in a trust. Trusts can hold cash, but they can also hold other assets such as bank accounts, securities, life insurance policies, real estate, intellectual property, personal possessions, cryptocurrencies and nonfungible tokens (NFTs), real estate, and ownership interests in a business—including an LLC.

This is not a complete list of what you can put in a trust. The ability to transfer title of an asset to a trust does not mean that it is the best place for it. Before placing any asset in a trust, consult an attorney about how the transfer might affect taxation, liability protection, and probate.

Once you have decided that certain assets belong in a trust, the next step is to create the trust. You will need to specify the assets to be placed in the trust, somebody to oversee the trust assets (a trustee), the individuals who will receive the trust assets at the specified time (the trust’s beneficiaries), and instructions for distributing trust assets to beneficiaries (the trust agreement). In addition, you will need to fund the trust by transferring title of the assets into the name of the trustee.

You will also have to choose the type of trust. A revocable trust is more flexible and can be changed during your lifetime, whereas an irrevocable trust cannot be changed once created. A testamentary trust can be created at the time of your death per instructions in your will.

A key feature of trusts is that once your assets are transferred into the trust, they technically are no longer your personal property. They are the property of the trust, which is managed by a trustee for the benefit of the beneficiaries.

This explains why some trusts can help minimize or avoid estate taxes. Also, because assets in a trust are not part of your estate at death, they do not have to be transferred to your heirs through the probate process; they are instead distributed according to the trust terms.

What Is an LLC?

An LLC is a type of business entity that provides liability protection to its owners and avoids double taxation. In terms of liability protection, when an LLC takes on debts and liabilities, its owners’ personal assets generally cannot be seized by creditors of the LLC as payment for what the business owes. LLCs also are not taxed at the corporate level. Instead, LLC owners pay taxes on business profits on their personal income tax return. This avoids the double taxation applicable to corporations.

LLCs, like other businesses, have assets such as real estate, vehicles, tools, equipment, and intellectual property. And like a trust, just about any type of asset can be transferred into an LLC, including personal assets like cash and bank accounts, property, and personal possessions. Thus, LLCs can also serve as tools in the estate planning process. To start an LLC, you file the articles of organization with the secretary of state where the business is located. That could be your home state, but you can start an LLC in any state. If you are primarily looking for asset protection, then it might pay to shop around in different states. Nevada and Wyoming have statutes providing strong asset protection. An attorney can help you identify the right state for your unique needs.

Most states also require you to file a report at least once per year. At startup, you pay a one-time filing fee. When filing an annual or biannual report, expect to pay approximately $100-$500 per filing.

The other major document for your LLC is the operating agreement. While it must comply with state LLC laws, the operating agreement typically does not have to be filed with the secretary of state. This document specifies the LLC’s internal rules and procedures. Although it is not always advisable, you can stipulate in the operating agreement that, when you die, the business passes to your heirs, or the income from the business goes to your kids. It is important to check with your attorney to ensure that you have carefully thought through all of the ramifications, for example, whether the heirs are prepared to become business owners and if this plan is acceptable to any existing business partners. Similar to a trust, transferring the LLC interests to beneficiaries can be a way to avoid probate.

Not only can you manage and pass on a family business through an LLC, you can also place assets in the LLC such as rental properties and vacation homes. In fact, just about any asset can be placed in the LLC, including money and personal possessions. Those with large estates can use a family LLC structure to minimize gift and estate taxes.

Is a Trust or an LLC Right for You?

To summarize, trusts and LLCs both have value as legal instruments that can shield assets from taxation and avoid probate.

LLCs have the added benefit of personal liability protection, but they typically have higher ongoing costs than trusts. One benefit of those higher costs is that you have a greater ability to manage the assets in an LLC. As noted, once you place assets in certain types of trusts, they are out of your hands. But there is a trade-off with regard to privacy. Trusts never become part of the public record, while the existence of an LLC—though not necessarily the identity of its members (depending on your state’s law)—is public information.

Some trusts and LLCs, when set up correctly, have the potential to protect assets from creditors. With trusts, you have to be careful to choose the right type of trust for maximum creditor protection. Even then, there is no guarantee that your beneficiaries will be completely protected. LLC asset protection varies by state, and care must be taken to treat the LLC’s assets separately from your personal property to keep creditors from being able to “pierce the veil” of the LLC and come after your personal assets.

In short, there are trade-offs associated with using either a trust or an LLC. One common way to minimize these trade-offs is to place an LLC inside a trust. If a trust owns an LLC, depending on the type of trust, it can add another layer of asset protection. In addition, one way to avoid having your name on state registration documents is to hire a third party to form the LLC for you and act as your registered agent.

Beyond the basic pros and cons of each legal vehicle, it comes down to how the trust or LLC is structured. Our legal team can help you choose the right tools for your needs and draft the agreements that align with your goals. To set up an appointment, please call or contact us.

Considerations Before Owning a Business with Your Spouse

Both running a successful business and having a successful marriage require commitment and hard work. Operating a business as a married couple can present its share of challenges, but being devoted to one another as spouses and as business partners can bring higher levels of accountability and trust to the business. If you and your spouse can find ways to balance your work and personal lives, owning a business together can make your relationship even more rewarding.

The potential for blurred lines in a couple-owned business makes it crucial that the business relationship be treated professionally from the start. Before embarking on a new business venture, you and your spouse should have a solid understanding of what each of you brings to the venture, how to divide responsibilities, and what type of business entity you will form. Have proper written agreements in place to ensure that mechanisms exist to deal fairly and legally with any problems that may arise.

Choice of Business Entity for Married Couples

Family-owned businesses are common in the United States. The term “mom-and-pop” business is not always meant literally, but there are approximately 1.5 million businesses run by married couples nationwide.

For the couple who shares everything—including a business—you probably have a good idea of how your skill sets overlap and complement each other. This is a good first step for evaluating the type of business structure that you should have. If you plan on both being owners and taking part in the day-to-day management of the business, a partnership, limited liability company (LLC), or corporation might make sense. One or both spouses can be managers of the business if they have an active role in its day-to-day functions.

Business Entity Tax Implications

The type of business entity you choose has important tax implications. Specific questions about ownership structure and taxation should be discussed with an attorney, but in general the following rules apply:

  • Sole proprietorships, partnerships, LLCs, and S corporations are pass-through businesses. This means that they are not subject to corporate income tax. Instead, profits from the business “pass through” to owners and are taxed at the individual level. If you and your spouse jointly own a pass-through business, you will each report your share of the business’s income on your individual tax return (e.g., 50 percent each if you co-own the business equally) and pay the appropriate amount of income tax. In addition, you will pay self-employment taxes on business income (i.e., Social Security and Medicare taxes).
  • If one spouse owns the business and the other spouse is an employee of the business, the owner pays income tax and self-employment tax, and the spouse who is an employee pays income taxes according to their salary. In addition, the owner spouse pays the employer portion of the Social Security and Medicare taxes of the employee Another distinction is that employee income taxes are automatically withheld from paychecks, while self-employed business owners must pay quarterly state and federal estimated income taxes. Failure to pay estimated taxes can result in penalties.
  • A business co-owned by a married couple is treated as a partnership for federal tax purposes unless there has been an election to be taxed as an S or C corporation. However, under Internal Revenue Service (IRS) rules, a married couple conducting a qualified joint venture can file their business taxes on separate Schedule C forms.
  • In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), special IRS rules may allow an LLC jointly owned by a married couple to be treated as a disregarded entity for federal tax purposes. In other words, they do not have to treat their business as a partnership. Rather, for tax purposes, the IRS will treat the business as a single-member LLC that is not separate from its owners.

Couple-Owned Business Contracts

When starting a business with a spouse, it may be tempting to rely on the trust you have built in your marriage to weather any storms. But if the marriage struggles or falls apart, this will inevitably affect the business. And even during good times, it is best to have everything in writing.

Depending on the type of business you form, make sure you have an agreement—such as a partnership agreement or an LLC operating agreement—that spells out the management structure, the process for dissolving or leaving the company, indemnification, ownership percentage, and the process for adding new members.

You might also consider a separate buy-sell agreement that details how to deal with the sale or buyout of a spouse’s ownership interest. This could come into play during a divorce, the untimely passing of a spouse, or if one of you simply wants to get out of the business.

If you are not co-owners, and one of you is an employee, you will need a contract that stipulates job duties, pay and benefits, how and when the employment relationship can be ended, the dispute resolution process, and other employment terms.

It may be initially uncomfortable to treat your spouse as a business partner complete with contractual obligations. But clear written rules for the business are a signal that you are both taking the business seriously. Your marriage is a contract, after all. Contracts are just a way to ensure that the parties are on the same page and equally committed.

To keep your business above board and professional, consider working with an attorney who can advise you on business entity structure, taxation issues, and contracts. A neutral and knowledgeable business attorney can provide a third-party perspective that sets up you and your spouse for long-term business success. Please call or contact our office to set up an appointment.