Running a business, especially a small one, means dealing with risks. Some of these threats are inevitable, but litigation is a threat you can actively defend your business against. Lawsuits are costly, stressful and can ruin the future of your company. Well, what steps can you take to minimize the chances of getting sued?
Let’s explore some simple, practical strategies to help protect your business from potential legal issues. No matter how new you are to business or how long you’ve been doing it, these steps will save you from expensive legal headaches.
01. Choose the Right Business Structure
When setting up a business, selecting the right structure is one of the most crucial decisions you’ll make. Many small business owners start as sole proprietors since this is so easy and inexpensive to set up. But when your business starts growing, however, this often isn’t substantial enough protection.
With a sole proprietorship, there’s no legal separation between your personal assets and your business assets. If your business gets sued, your personal assets, such as your home or savings, could be at risk. By incorporating your business as a limited liability company (LLC) or a corporation, your personal and business assets are kept separate. This structure ensures that, in the vast majority of cases, only your business assets will be at risk upon the emergence of a lawsuit.
Take the time to consider whether an LLC, S corporation, or C corporation best suits your business needs. Speaking to an experienced business lawyer will guide you in the decision that is best to protect you in the long run.
02. Invest in Insurance
Insurance is something you don’t think you need until you need it. Lawsuits can arise from many sources—customers, employees, or even other businesses. Standard general liability insurance covers for accidents on your business premises, but that may not be enough.
Consider additional policies like employment practices liability insurance (EPLI) to cover claims related to employee disputes, such as discrimination or wrongful termination. And, errors and omissions (E&O) insurance, which can be beneficial for service companies to cover claims of negligence or mistakes in the services you perform.
Having the right insurance policy won’t prevent a lawsuit from happening, but it can help cushion the financial blow if you do find yourself facing one.
03. Use Solid Contracts for Everything
It is tempting to think that handshake or verbal agreements are good, but they are very risky. Formal written contracts offer much more protection. When disputes arise, a well-drafted contract can serve as your legal shield.
When transacting with other companies, customers, even employees, always use written contracts. These agreements should specify the terms, including payment, what will be delivered, and how to settle disputes. That doesn’t necessarily hire a lawyer to draft every agreement, but it’s wise to ensure that major contracts are drafted or reviewed at least once by a legal expert.
By setting out explicitly what each party is entitled to expect and is required to do, you avoid confusion that could result in litigation.
04. Train and Educate Employees
If you have employees, they’re your first line of defense against litigation. From customer interactions to workplace behavior, your employees’ actions can either protect or expose your business to lawsuits.
First, make sure your employees are well-trained in company policies and legal compliance, from how to treat customers to what anti-discrimination laws mean. Second, set up clear human resources policies for handling complaints, ensuring that employees know their rights and responsibilities.
You can also reduce risks by conducting regular training on sexual harassment prevention, diversity, and inclusion, as well as safety protocols. With these policies and educational materials in place, it may be possible to reduce the risk of an employment lawsuit.
05. Protect Your Intellectual Property
Intellectual property (IP) is probably not something that small businesses think much about, but protecting your name and your products or services is crucial. When someone violates your IP, it can drain your company’s resources and tarnish your reputation. Likewise, accidentally infringing on someone else’s intellectual property could result in a costly lawsuit.
Safeguard your logos, trademarks, and whatever special products or services you provide. Trademark registration can prevent others from using your business name or branding. If your business involves creative work, consider copyrighting your material. This single act can avoid future hassles and secure your brand identity.
06. Be Proactive in Customer Service
Disputes between customers and service providers are a fact of business life, but they don’t always end up in court. Providing excellent customer service can go a long way toward reducing legal risks. If you act quickly to resolve customer complaints, you could stop growing resentment from blossoming into a lawsuit.
Promote an open dialogue with clients. If customers do have complaints, address those concerns in a timely and professional manner. Often, customers just want to know that someone cares about their problems and will try to help resolve them, whether through a refund policy or a dedicated customer service team. This often helps to prevent small disputes from becoming expensive lawsuits.
07. Comply with Employment Laws
Employment disputes are one of the most common reasons small businesses get sued. These include claims of discrimination, harassment, wrongful termination, and wage violations.
To protect your business, stay updated on federal, state, and local employment laws. If you’re in doubt about any particular rules, consider consulting with an employment lawyer. Even if your firm is not big enough to set up a formal HR department, it’s extremely important to keep employee performance records in writing as well as the disciplinary action taken previously.
Have clear job descriptions, and ensure that all hiring, firing, and promotions are based on documented, bona fide business purposes. This transparency can protect you from many of the common employment-related lawsuits.
08. Secure Your Business Data
Today, it is all too easy to get into serious legal issues with data breaches. The more data businesses collect from customers and employees, the more they are targets for hackers. Breach of sensitive information may cause potential litigation not only from customers but also from government agencies enforcing data protection regulations.
Invest in cybersecurity, such as encryption and firewalls. Update your software regularly to patch these vulnerabilities, and train employees on best practices for handling sensitive information. Most importantly, having a plan in place to deal with a data breach minimizes the legal risk.
09. Maintain Accurate Business Records
Detailed records of business transactions, employee communications, and contracts of all kinds can be your lifesavers in court. Good recordkeeping will act as proof that you’re operating your business honestly and legitimately.
From financial transactions to tax papers to client correspondence, make sure that everything is on paper. All those documents can be used as evidence if your business ever be taken to court.
10. Consult with Legal Professionals
You don’t need a full-time legal team to protect your business, but having a lawyer on hand can be invaluable. Whether it’s for setting up contracts, dealing with customer disputes, or ensuring compliance with employment laws, a legal professional can help you avoid common pitfalls.
Most small businesses don’t consult a lawyer until it’s too late—when they are being sued. So, taking a proactive approach by seeking legal advice when needed can save you time, money, and stress in the long run.
Conclusion
Running a small business is never easy, but getting sued doesn’t have to be part of the deal. With the following risk management strategies, you can lower your risk of expensive litigation and keep your business on track to success. Remember, the best defense against a lawsuit is preparedness, so take these steps today to secure your company’s future.
