Ways to protect your new enterprise

Question: I am starting a fashion industry video-promotion firm with a longtime friend. I own my home and do not want to risk losing it or anything else if the business is sued. What type of insurance should I obtain, and how much will it cost?

Answer: Every business should have commercial general liability insurance, which covers bodily-injury and property-damage losses. Most commercial landlords require you to carry this coverage.

You’re likely to pay about $1,000 annually for general liability, said Dave Ortolf, owner of Adams Avenue Insurance in Huntington Beach. However, it will not cover professional liability, automobile liability or workers’ compensation; you’ll need separate policies for each of those areas.

Professional liability insurance, sometimes called errors and omissions insurance, is specialty coverage that protects your firm from legal claims made for failure to perform up to your area of expertise. Premiums start at about $3,000 annually, Ortolf said.

Professional liability insurance can be extremely valuable, Ortolf said, recalling the case of a computer consultant client who opted for general liability insurance but didn’t want to buy professional liability coverage. “He missed an error in a big batch of CD-ROMs that he had been hired to produce and all the CDs were ruined. There was no insurance coverage because the claim was a result of failure in his professional services.”

If you will have employees, the law requires you to carry workers’ compensation coverage, which starts at about $1,000 a year. “Some small businesses may save a few hundred dollars by going to the state fund,” Ortolf said. For information on the State Compensation Insurance Fund, visit www.scif.com.

Insurance is your firm’s first line of defense, but a second layer of protection can be created by forming a limited-liability company or a corporation. “One of the fundamental purposes in forming these entities is to separate and insulate personal assets from the liabilities inherent in the conduct of your business,” Ortolf said.

Q: I am designing and creating a fun product. How do I determine how much to charge?

A: Pricing is crucial. Get it wrong and you can work your way straight into bankruptcy. Here are a couple of pricing strategies:

* Cost coverage. Figure out your real product cost and make sure you charge enough to cover it.

“The cost can change based on the volume of production, so pricing often needs to be set given the assumption of certain volumes of sales,” said David A. Walker, a pricing expert at New Perspectives Consulting Inc. in Westlake Village. “Since it’s a fun product, consider the likely demographics of your buyer -- whether it’s a child, young adult or older person -- as well as what they spend to entertain themselves typically.”

Don’t forget to include things such as travel, office costs, marketing expenses and overhead (taxes, insurance, licensing) in your cost calculations.

“Sometimes you may want to go in for less than cost when you sense that once you are established with a customer, there may be a better chance to gain high-profit business,” Walker said. “Just be aware of the risks involved.”

* Competitor comparison. Do a market analysis and see what your competition is charging, but don’t take the knee-jerk route of immediately undercutting rivals. Look at your marketing plans and decide how you want to position yourself in the field. You may want to be the cheapest product out there, but be aware that charging less may signal customers that your quality is lower too.

Another danger is that your rivals may see your price and cut their prices accordingly -- to a level you can’t match. If you price similarly to or higher than your competitors, you can market your product as delivering superior value.

Got a question about running or starting a small enterprise? E-mail it to karen.e.klein@latimes .com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.