Published April 06, 2012
When you own a business, especially a successful one, lawsuits are sometimes inevitable. Small businesses are a popular target because people assume most will settle rather than go through the hassle and costs of defending a suit.
“If you haven’t been sued at some point then you probably haven’t made that much money,” says Charley Moore, founder and chairman of RocketLawyer, an Internet-based legal service. “It's pretty unavoidable in a successful business’ life span.”
Although there’s no guarantee your business won’t ever be sued, there are steps you can take to mitigate the risk.
According to Josh King, general counsel at Avvo, www.avvo.com, a legal and health website, an obvious mistake small businesses make is not having the right corporate structure. While many small businesses will structure their company as a sole proprietorship, King says being an LLC or S-Corp will minimize the chances of any lawsuits impacting the individual.
“You don’t want the liability to pass through to you personally,” says King. “You always want to find the best structure.”
A surefire way to prevent a lawsuit from happening is to be compliant with the law. That means knowing what to file, when to file and keeping accurate records, says Moore. For instance, if you have employees working on site, make sure you are following labor laws and posting notices throughout the workplace where required. If you’re business provides products and services to the government, ensure all their rules and regulations are followed.
Hand-in-hand with being compliant is using best practices, says Barbara Weltman,
Publisher of Big Ideas for Small Business. Employing best practices -- whether it’s dealing with partners, employees or customers -- will shield you from any misunderstandings that could result in a lawsuit down the road.
“If you are dealing with other parties make sure everything is in writing,” says Weltman. “You have to have best practices in everything you do.”
For many small businesses, one area that can be trouble is dealing with employees. Not having a culture of fairness and not setting clear rules can cause problems if employees feel they aren’t being treated well or compensated properly for their work.
“A huge way to avoid lawsuits is get employment agreements in writing,” says Moore. What’s more, he says to clearly lay out the rights of employees and make sure to get an arbitration clause into the employment contract. Having that will keep you out of court if there is a conflict with an employee.
Instituting an employee handbook and training managers in sexual harassment and discrimination are all things that can prevent a lawsuit.
Small businesses will often strike deals with other businesses or work with consultants on specific projects. Whatever deal you strike or whatever contract you ink, make sure it’s in writing.
“Recording everything in writing is one of the best ways to avoid litigation,” says Moore. Having the rights and responsibilities of each party in writing will also put you in a stronger position if you are sued.
Customer lawsuits are also a common threat facing small business owners. The chance of that can also be reduced by being clear about return policies and service guarantees, says Weltman. The worst thing a small business owner can do is ignore a customer complaint or problem. “Follow up as soon as anything happens to address the issue before it rises to the level of a lawsuit,” she says.
If you do nothing else, taking out the proper type and level of insurance will protect your business if it does end up getting sued. “Having the right kind of insurance is wonderful because when you are sued the insurance company will defend you,” says Weltman. “It makes it easier and you won’t have to give into these lawsuits.”
Click here for more articles on “Protecting Your Small Business.”