What Every Small Business Onwer Needs to Know About Lawsuits

Kathy Simpson

Small businesses bear a big financial burden when it comes to civil litigation. What steps can you take to protect yours?

Lawsuits can come from any direction: dissatisfied customers, disgruntled employees, other companies or competitors – and anyone else with a cause, real or frivolous. The liability threat is a costly proposition and one every small business should take seriously.

These statistics drawn from a U.S. Chamber Institute for Legal Reform study makes a case for taking preventive measures before you’re summoned to court. Read on for recommendations for all small business owners.

Preventive Measures

To reduce your risk of a lawsuit:

Make sure you’re insured. If you’re sued, liability insurance can be a business lifesaver. Meet with an attorney to ensure you understand your specific liability risks. Discuss your protection needs with an insurance agent who can help you evaluate your insurance needs.

Protect your personal assets. If you’re operating as a sole proprietor, you’re personally liable for your business-related expenses. This means that if you’re sued, all of your personal assets – from your home to your retirement plan and everything in between – are fair game. To reduce this risk, you can legally separate your personal assets from those of your business by forming a corporation or a Limited Liability Company (LLC). The LLC in particular has minimal reporting and administrative requirements.

Anticipate your risks. In what possible ways might you be found liable? Identify your areas of vulnerability and take steps now to prevent a surprise later. Think broadly. Some risks might be obvious. For instance, a roofer clearly could be held liable for interior water damage caused by a poor roofing job. On the other hand, an independent management consultant might not realize the risk of delivering well-intentioned advice that causes a customer financial harm.

Get agreements in writing. Oral agreements may be legally binding, but they’re easy to misinterpret and difficult to defend in court. Use written contracts to document your business agreements with the third parties with which you do business: suppliers, customers, temporary help and the like. Spell out details such as duties, obligations, costs, deadlines and damages for breach of contract. If a dispute arises, the contract will be an invaluable document for all parties to refer back to.

Take complaints seriously. Whatever the source, respond quickly. Investigate the issue, document the circumstances in detail and make any reparations that are practical and possible. Action taken now can help prevent repercussions later.

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