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5 Steps to Avoid Your Business Being Sued

When we talk about avoiding business lawsuits, we’re really talking about managing risk. Facing a lawsuit can be costly and stressful, so taking steps to secure your business from being sued makes for smart business. An owner of a frozen yogurt shop on a busy corner discovered this too late when she was served with two lawsuits in the span of three weeks.

First, a long-time supplier held that the business had broken its agreement, even though until recently the supplier was unable to deliver orders on time. Soon after, a customer filed a personal injury lawsuit, alleging he suffered a concussion in the restroom. Meanwhile, the shop had just launched a promotion, and the lines extended out the door.  But instead of focusing on her successes, the owner faced financial disaster.

This isn’t unusual for small business owners. On average, about up to half of small businesses face or are threatened with litigation each year, according to a recent Small Business Administration (SBA) survey. But unlike large corporations, small and mid-size businesses typically can’t afford in-house legal counsel. The SBA also found that the smallest businesses bear the biggest brunt when it comes to lawsuit costs. These costs range anywhere from the $5,000 range to upward of $200,000.

The costs of litigation, added to the emotional anxiety and stress of a lawsuit, turns business owners’ attention from running a successful enterprise to legal matters.

This doesn’t have to be you. There are ways to manage the risk of being sued that are simple, straightforward and inexpensive.

5 Steps to Stop a Lawsuit Before It Starts

Know the Risks.

A small business may be sued over:

  • Customer disputes. Customers may allege discrimination under state or federal law, refusal of service or personal injury as reasons for filing a lawsuit.
  • Employee disputes. Violations of wage and hour laws, workplace environment, workplace discrimination laws, wrongful termination and workers’ compensation are all reasons employees may file a lawsuit against their small-business employer.
  • Business disputes. Breaches of contract and copyright infringement are the two main reasons behind business disputes that lead to being sued.

Keep Personal Assets Safe.

You can structure your business as a sole proprietorship, which is the simplest approach. However, sole proprietorships don’t separate your personal assets from your business ones. So your home, personal savings and other assets could be at risk if your business is sued.

Instead, consider structuring your business as an LLC, an S corporation or a C corporation. All three keep your personal assets safe, but have different taxation and shareholder requirements and set-up costs. Consulting with a business attorney as to the best structure for your company can save costs down the road.

Buy the Right Business Insurance.

Just like you insure your home and your car against potential catastrophes, so should you carry business insurance. While general liability insurance may protect you against personal injury claims, it may not hold up against employee claims like a hostile workplace or wrongful termination. Nor may it cover breach of contract costs.

Consider carrying insurance that has a broader coverage range than just general liability. It can save you litigation and damages costs and gives you peace of mind so you can concentrate on running your business.

Use Contracts.

A written, signed contract formalizes arrangements with suppliers and employees and is harder to dispute than a handshake or verbal agreement. However, have a business attorney review contracts to be certain they’re legally binding in court. This will guarantee they follow California’s employment and business contract laws.

Keep Communication Lines Open.

As the business owner, it’s up to you to promote open communication with your employees, your customers and your suppliers. People want to be heard, especially if they feel they’ve been wronged. Discussing a potential issue before a problem arises, and listening and responding to grievances may quash thoughts of litigation before they arise. But this can only occur if people know they can talk to you openly without fear of reprisal.

The frozen yogurt shop owner was able to navigate her way through the two lawsuits, with help from a savvy business attorney. However, she paid a financial and emotional price. She learned that, as a small business owner, it’s impossible to know what’s around the corner. However, knowing that your business is protected to the greatest extent possible can help keep you calm — and your business safer — in times of uncertainty.

At LawPLA, we provide small and mid-size business owners with peace of mind. If you’re concerned over the impact of future lawsuits, contact us to arrange a consultation. Just call our office or use the contact page on our website.

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