The U.S. Small Business Administration’s Office of Advocacy noted that “[t]he impact of litigation on businesses goes well beyond the purely financial impact of legal fees and damages. Most small business owners are invested personally in their businesses; litigation causes not just financial loss, but also substantial emotional hardship, and often changes the tone of the business.” To avoid these adverse results, be proactive in how you conduct your business from a legal perspective and don’t make mistakes:

1. Choose the right entity.

How you pick your business structure from a legal perspective—as a sole proprietorship, partnership, limited liability company (LLC), S corporation, or C corporation—not only impacts how your profits are taxed. Your choice also impacts your personal exposure in case of lawsuits. In order to have personal liability protection, so that your home, your bank account, and other non-business assets are out of the reach of business creditors, you need to be an LLC or a corporation (C or S). What to do: Assess whether your type of business has potential personal liability exposure and then use an entity that provides personal liability protection. If you are currently operating as a sole proprietorship or partnership, you can change entities. Talk with an attorney who can advise you on this matter.

2. Do things the right way when you hire employees.

Be sure to avoid any discriminatory practices in hiring, promoting, and firing employees. Missteps can trigger challenges from the Department of Labor (federal and/or state) as well as lawsuits from unhappy job applicants and workers. What to do: Review your employment practices (e.g., questions you ask applicants, procedures for terminating employees). When in doubt about actions you can and cannot take, talk with an employment law attorney.

3. Use non-compete agreements.

If you share your company’s sensitive information—customer information, trade secrets such as pricing, a new product offering, or other intellectual property—be sure that the information won’t go beyond the party you intend to share it with. What to do: Have your employees sign non-compete agreements when they are hired and make it clear that you will enforce the agreement if they violate it. Also use these agreements in the course of your business (e.g., when you engage a manufacturer to produce your products). There are templates online that can be used to create a non-compete agreement, but it’s wise to have an attorney review it or create a unique one that meets your needs.

4. Know the regulations that apply to you.

The government can be relentless in pursuing violations, and the cost of contesting the charges can be daunting. What to do: Keep the government off your back by following the rules. There may be special ones for your industry (e.g., EPA rules for lawn care businesses); other rules, such as minimum wage and overtime rules, apply across the board. Check with your trade associations and chambers of commerce for new regulations that could impact you.

5. Address customer concerns.

Customers who are dissatisfied with your goods or services may be angry enough to bring a lawsuit. What to do: Face up to customer complaints; you may be able to avert legal action by correcting the problem up front. But sometimes you can’t rectify a customer complaint, so be sure to carry the right insurance if lawsuits arise (e.g., errors and omissions policy for malpractice activities; liability coverage in case customers are physically injured on your premises).

You can’t protect yourself completely from potential litigation or other legal challenges, but you can minimize your exposure. The cost of legal advice before problems arise is must less expensive than litigation. And be sure that you have insurance protection just in case you’re sued.

 

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