Don't Get Sued: 5 Tips To Protect Your Small Business

By Glenn Curtis AAA

As a business owner, it's your responsibility to do everything within your means to limit risk and to keep the business running smoothly. But how does one go about limiting the possibility of a lawsuit to ensure business continuity? In this article, we'll take a look at five actions you can take today to protect your company for tomorrow. (For background reading, see It's Raining Lawsuits: Do You Need An Umbrella Policy?)

Tutorial:
Starting A Small Business

1. Watch What You Say and Do
First of all, when it comes to your business image, owners and their employees should avoid making any public announcements or conducting any business that might be considered questionable. This means avoiding things like libelous or potentially slanderous statements, but it also means not doing business with unscrupulous individuals. You may not think it's a problem working for a group of individuals who are known for shoddy business practices - because you know your company's ethics are above reproach - but if they take a hit, your company's name may be linked to them in the fallout.

This point also includes limiting any possible conflicts of interest. Business owners and their employees must avoid situations where a conflict of interest may present itself. Situations such as these can damage your integrity as a business owner and could land you in legal hot water. For example, sitting on the town council and helping pass an ordinance that benefits your business would be a conflict of interest, even if you didn't make a decision with any benefit for your company.

2. Hire a Competent Attorney
Business owners should interview attorneys when they first start up, in order to have a ready legal contact. You may need this person to advise you before you act or on how to react when you've been sued.

Owners should also attempt to secure an attorney that is familiar with local laws and customs in the area in which the business operates. Care should also be taken to retain an attorney with expertise in a particular field if necessary. If your company is anticipating legal challenges from the Internal Revenue Service (IRS) or taxation state department it makes sense to hire a tax attorney.

There are several potential resources to help you find a good attorney. These include cold calling and interviewing from the phone book, professional references from other business owners, or through the professional organizations to which the company belongs (like the local chamber of commerce or any sector association). (To learn more about business legal issues, read Protect Your Company From Employee Lawsuits.)

3. Separate Yourself From Your Business
Many business owners own and operate their businesses as sole proprietorships. The only problem with this is that in the event the company is sued, the owner's individual assets (such as their cars or home) are fairly easy to attack or attach in a court of law.

The solution to this, or at least a way to limit the possibility that the owner's personal assets might be the target of a suit, is to have a trust own the business. A trust is a legal entity that, in most cases, files its own tax return and can own property, businesses, cash, securities and a host of other assets. If a business is owned by a properly established trust, and it is sued, in most cases the only assets that can be attacked or attached in a court of law are those that are in the trust itself.

Incorporating separates your company's finances from your own. This makes your house and personal wealth safe from attack even in the event you lose your business in a judgment. The downside to incorporating can come from understanding and keeping up with the additional laws, reports and taxes that the government requires for a corporation.

4. Insure Yourself
All businesses should obtain liability insurance in case (for example), a customer was to slip and fall in your place of business. Certain professionals, such as insurance agents and/or consultants, should also consider obtaining errors and omissions coverage to ensure the business should a customer or client accuses the owner of making some sort of error, or not living up to a contract. (To read more about this area of insurance, see Filling The Gaps In General Liability Insurance and Cover Your Company With Liability Insurance.)

If the business is large and has a formal board of directors, it may also make sense to secure directors and officers liability (D&O) insurance. Once purchased, this insurance protects the directors' personal assets in a larger suit against the company.

In addition to purchasing insurance, another way to insure yourself against liability is to build protection into your contracts. If an act of nature, a specific supplier or some other uncontrollable act can make it impossible for you to fulfill a contract (and thus open yourself up to legal action) then you should be putting to ink that you are not liable for incomplete work due to these factors. Discussing the possible clauses and legal phrases needed in your work contracts is one of the best ways to employ your lawyer's time and it will reduce your need for a lawyer later on in your business venture.

5. Protect Your Files
As most businesses these days work quite intensively on computers, it makes sense to emphasize the safety requirements for your computer system. Businesses should have updated antivirus and other types of security software loaded and activated on their systems. If a computer system were to go down because of a virus, the business may be at risk of not being able to perform certain contracted work. In addition, key files could be lost or stolen, which could then lead to legal action from clients and/or suppliers.

Employ Backups
In the event of a massive technological breakdown, you should have a set of backed up files to refer to. This could mean performing daily, weekly or even monthly backups, and making your clients aware of which you employ. Keeping these backup files offsite will also help to ensure your company's continued safety. If you keep these files at your place of business, it is necessary to purchase a fireproof safe in which to store your files. Should the very worst happen to the rest of your materials and supplies, your backups would be protected.

Additional Safeties
In the event of a disaster such as a hurricane or fire, will your business be able to function? Failure to operate could lead to the company's inability to live up to certain contractual obligations or to satisfy other legal or financial agreements.

Consider securing alternative work sites, portable generators, call trees and/or ways to have employees work remotely to make it a little easier for your company to perform its work when the the forces of nature throw you a curve-ball.

Bottom Line
Business owners have the responsibility to protect their companies and their personal assets in the event of a lawsuit. With these five actions under your belt, your business should be well on its way to a legal- and hassle-free future.

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