9 Ways to Avoid Small Business Lawsuits

By on October 28, 2013
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Small businesses are easy targets for litigious customers and disgruntled employees, and lawsuits can cost small businesses a lot of money. The legal fees alone can be several thousand dollars. Even if you are in the right, it’s expensive to prove your rights. The best thing you can do is be proactive and take all necessary precautions to protect your small business against lawsuits. Here are 9 ways you can mitigate the risk of being sued.

1. Keep Personal Assets and Business Assets Separate

Entrepreneurs starting new businesses often lean toward sole proprietorship as their legal business structure, primarily because sole proprietorships are easy and inexpensive to start up. The problem is that this structure does not separate personal assets and business assets. The sole proprietor is 100% responsible for all actions and debts of the business. In the event of a lawsuit, you could lose your car or home if not protected.

One way to protect your personal assets, and separate them from your business assets, is to have a trust own the business. A trust, in most cases, can file taxes and own assets such as property, businesses, cash, etc. If a business owned by a trust is sued, the court can only touch the assets held in the trust itself.

Choosing a different legal business structure, such as a corporation, can also protect your personal assets. Corporations are more expensive and time-consuming to form, but they separate personal and business assets protecting you if you are sued. Incorporating may or may not be a viable solution for you. Consult with a qualified business attorney to discuss your options.

2. Don’t Engage in Questionable Business Practices

You don’t have to know a lot about business to know if an action is questionable or immoral. There are things you just don’t do in business, especially if you want to avoid a potential lawsuit. Check out our short list of “don’ts” and consider what you might add.

  • Do not make false statements or claims, or engage in libel or slander that can cause damage to a person’s or company’s reputation.
  • Do not use other people’s work without permission. Copyright and trademark violations will get you sued in a heartbeat.
  • Do not ignore customer complaints. Most are easily resolved, but lack of communication can cause matters to escalate.
  • Do not do business with shady companies. They will take you down with them.
  • Do not participate in any behavior that may be a conflict of interest, like consulting for a competitor.
  • Do not ignore state and federal regulations. Consult a qualified business attorney if you are unsure of what regulations apply to your business.

Common sense? Maybe, but you can’t afford to take a chance. Educating yourself and your employees, and avoiding questionable business practices, can help you avoid potential lawsuits.

3. Document Everything

The days of the gentlemen’s agreement and handshake are over; verbal agreements will not hold up in court. All contracts and agreements must be clearly stated in formal, written documentation. Contracts or agreements that are not in writing, or that are unclear, are among the leading causes of small business lawsuits.

Written agreements must be comprehensive and include details such as sale terms, costs, time frames, dispute resolution, etc. It’s a good idea to have an attorney review all written agreements to ensure they are fair and legally binding.

4. Protect your Business Records

Protecting files and records that pertain to your business is extremely important. You never want to be in a situation where you cannot fulfill contractual obligations because of virus for some other tech disaster. Ensure your computers have updated antivirus programs and other types of security software activated on their systems.

Backing up your records and files daily, weekly, or monthly is one way to ensure information is not lost for good. You may even want to consider keeping copies of files offsite in the event of a natural disaster.

5. Employ Data Privacy and Security Measures

As a business owner, you must ensure customer and vendor information is safe or you could find yourself in court over a security breach. If you are collecting customer data, especially personal and financial information, be sure you are implementing security measures that are effective and legally defensible—being able to justify your security standards and strategy in court, if necessary.

Documenting processes and procedures is an important step in ensuring your business security strategy is legally protected. Documentation should include how the solutions address specific legal concerns and should be updated continuously as changes are made. Keeping an updated document is beneficial in the event you must present to the court.

6. Train your Employees

Train your employees in company practices. Training is a proactive approach to mitigating potential problems. It’s time well spent! Educate your employees in the typical HR issues, like sexual harassment, workplace safety, workplace conduct, vacation, leave, termination, etc. And, if you have a strong online presence or use social media for marketing and promotion, train them in online conduct and social media policy. Clearly written policies and employee handbooks are a must to avoid potential misunderstandings with employees or former employees.

7. Maintain Safety in Common Areas and Business Property

If you own business property, you must be sure to keep all walk areas (parking lots, sidewalks, hallways, bathroom and kitchen floors, etc.) safe and well-maintained. Accidents happen and you can’t prevent every slip and fall, but you can be proactive in mitigating personal injury claims by keeping your facilities safe and free from hazards. If your building is undergoing necessary cleaning, construction, or renovation, post appropriate signage and communicate these events to your customers and employees.

8. Buy Commerical Liability Insurance

You cannot prevent all accidents and claims against your business. It’s to your advantage to get liability insurance in case you are sued for any reason. There are many different types of policies available. Consult with an insurance professional to determine which type and amount of coverage is sufficient for your particular business.

In addition to purchasing insurance, you can also build protection into your contracts by including legal clauses. Your attorney can draft clauses and phrases for you to ensure they are legally binding. Incomplete work due to natural disaster conditions is one example of a clause you may want to include in your contracts.

9. Make Legal Contacts

Obtaining legal advice can save you a lot of money in the long run. Make legal contacts early on so that you are prepared if you need advice in a particular area or if you get sued. Ensure whomever you choose is familiar with local, state, and federal laws in the area your business operates

There is risk involved in all business ventures. Even if you do everything within your power to safeguard your business from lawsuits, you may still get sued eventually. The most you can do is be proactive and be prepared.

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About Toni Banks

Contributing writer for FSN - As a professional writer for the Legal, Finance, and Technology industries, Toni understands there is an overwhelming amount of information available to you and wading through confusing terminology and difficult concepts can be difficult. Her primary aim is to offer focused, clearly-written information on current topics that resonate with her readers. Find Toni on !

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