Entrepreneurs can choose from a number of different trading vehicles each with its own advantages and disadvantages. Potential liability issues should always be a major factor when considering the trading vehicle, and one way to weigh the pros and cons is to consider the three points of the liability triangle, AKA the great pyramid.

This is a simple way to represent three key elements that are interconnected and, when combined, allow the business to protect itself effectively from liability issues.

These three elements are:

• Trading terms.
• The insurance product or indemnity.
• Incorporation

By clarifying the products or services that are on offer as well as the price, payment terms, any warranties and limitations of liability, clear trading terms can offer protection in the case of any dispute.

Trading terms should be backed by suitable insurance arrangements, such as product liability for goods and indemnity insurance for services. The choice of a trading vehicle is the third point of the pyramid. There are various models or forms of incorporation, but some of the most common are sole traders, partnerships, limited liability partnerships and limited companies.

Small businesses often start out or continue to operate as sole traders due to low administration costs and simplified legal requirements. The key risk for sole traders is they assume personal liability for the trade. Focusing on the trading terms and insurance elements of the pyramid can help minimise liabilities.

Partnerships have a number of key features. They are not legal entities in their own right and cannot own assets or grant security over them. Partners are jointly liable for debts and obligations, and it’s recommended that anyone setting up a partnership should seek professional help in putting a partnership deed in place. A limited liability partnership, meanwhile, is its own legal entity, but the default position is that there is no separation between management and ownership.

A limited company also exists as a legal entity separate from the shareholders. The participators have limited liability, with the company itself being responsible for debts and liabilities.

There are other models, with each having its own benefits and drawbacks, and it’s essential that businesses consider all three points of the pyramid, choosing the best insurance solutions for their trading vehicle.