The threat of litigation is a fact of life for small business owners. Even when taking every possible step to do the right thing there is always a chance that the unforeseeable happens and your business finds itself embroiled in a lawsuit.
While some industries face higher litigation risks than others, every small business has liabilities that could make them vulnerable.
You owe it to yourself and your hard work to protect both your company and your personal assets. There are steps you can take to protect yourself before you are placed in a vulnerable position.
Even the most risk averse amongst us can find ourselves in tricky legal waters when operating a business. But, by taking the following simple steps, perhaps you can avoid the risk associated with the most common small business lawsuits. Remember to watch what you say and do to your employees and to the general public, strive to engage in scrupulous business practices, aim to meet all of your contractual obligations, secure the appropriate business insurance and seek out talented and reliable business legal counsel to have in your corner.
1. Hire a Competent Business Attorney
The most important step you can take to protect yourself from being dragged into court is to hire a competent business attorney. Having a business attorney to consult with and to guide you through some of the more complicated legal issues facing small businesses will help you make better decisions.
Often, small businesses get into legal trouble not because they are reckless or evil, but because they are unaware of the potential risks of a given business decision.
An experienced attorney knows how to spot unnecessary risks and can help you protect your business from unwanted lawsuits without being paranoid.
The right attorney can advise you on everything from your business structure to contract practices. Your customers, vendors, and competitors are all looking out for themselves. When you have an attorney, you have a professional in your corner, looking after your best interests.
2. Legal Business Structure
No successful business owner ever came up with the idea for how to structure their business before coming up with the idea for what their business will actually do. However, next to the basic idea for your business, your decision for how to structure your business will influence your long-term prospects more than any other decision.
While you are always free to operate a business without a legal business structure, you are putting your personal assets at risk.
Forming a legal corporation or limited liability company (LLC) allows you to shield your personal assets in the event of a devastating lawsuit or a business failure.
Every legal business structure has different advantages. A business formation attorney can help you pick the right business structure for your situation. Having the proper legal structure will help separate your business liability from your personal liability. It can also make a difference in your tax liabilities.
Once you have chosen the right business structure, you also need to meet specific corporate maintenance requirements to keep all of the benefits of the structure. Failure to pay your renewal fees, hold legally-required meetings, or properly document company decisions can lead to a judge declaring the company is simply the “alter ego” or “instrument” of the owners and “pierce the corporate veil”.
This could allow a creditor to access the personal assets you set up your business to protect.
3. Separate Yourself from Your Business
When you own and run a small business, it often feels like that business is your entire life. However, if you haven’t taken steps to separate yourself from your business in key legal and financial ways, you are increasing your legal risks and the possibility that an owner’s personal assets could be targeted in a lawsuit.
If you want to mitigate the risks of being sued, and if you want to protect your home and other personal assets, you need to ensure that your business is a separate entity from you.
One mistake many business owners make is they fail to strictly separate their personal expenses from their business expenses.
This is a dangerous practice for several reasons:
- It increases the chances of your making a mistake on your taxes
- It may increase the odds of you being audited by the IRS and state tax agencies
- It could lead to the disclosure of your personal financial details in a lawsuit
- It increases your liability if you default on a business loan
- It limits your ability to bring on partners
- It creates additional risk of shareholder or member lawsuits
The best way to reduce your chances of being sued for issues arising out of your business is to separate yourself both legally and financially from your business.
When you keep all of your accounts separate, and you operate the business as an independent entity, your business becomes a firewall between anyone suing your business and and trying to attach to your personal assets.
4. Document Everything
Did you know one of the most common causes of business lawsuits is each party has a different memory and understanding of a verbal agreement?
Any attorney will tell you that you can have a contract that is not in writing. They will also tell you that if you want to protect yourself, you need to document everything.
You want to avoid misunderstandings and miscommunications. You should always create a written document, even if it’s an email, that outlines the rights and responsibilities when working on a deal.
You also want to have a clear written record of all payment details.
When you have a set of accurate, detailed business records, you substantially decrease the chances of having to deal with a lawsuit.
Your business records should include the dates of any payments sent or received, the parties to the payment, the amount of the payment, and the purpose of the payment.
Records allow you to easily clear up any misunderstanding and gives your attorney the ammunition they need to cut short any bad faith lawsuit relating to your business activities.
5. Identify Risks and Implement Procedures to Minimize Them
Every business has a unique set of risks. If you want to minimize the chances of being sued, you need to identify all of the risks facing your business. You may need the help of an outside expert to help identify these risks.
Once you know what risks you’re facing, you need to create a set of procedures to minimize those risks.
For example, if you operate a business that handles a lot of cash, you are at an increased risk IRS issues, employee theft, and claims of fraud. You will need to create a set of standard operating practices that carefully track the cash from the moment your business takes possession of it until it is deposited in your bank account.
If you have been in business any amount of time you likely have risks and liabilities that you have no idea about. Avoid getting caught unaware have your attorney perform a legal risk assessment to determine what, if anything, needs to be done to mitigate any potential legal liabilities that were found.
6. Have the Right Insurance
The truth is, even if you are the most vigilant and diligent business owner, bad things can still happen. You cannot prevent everything, that is the risk of doing business.
However, you can further mitigate the level of your risk by having the right type of insurance to protect you from the things you cannot control.
Some common types of insurance small business owners need include:
- Business Owner’s Policy
- Directors and Officers Liability Insurance
- Business Income Insurance
- Professional Liability Insurance
- Commercial umbrella insurance
- Data Breach Insurance
- Workers’ Compensation Insurance
- Commercial Property Insurance
- General Liability Insurance
- Errors and Omissions Insurance
The right mix of insurance products can help your small business weather a crisis, including a lawsuit that might otherwise force you to close your doors.
Smart business owners know that running a business of any kind opens you to the risk of being sued. However, you can take steps to mitigate those risks and protect yourself and your business.