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

... And avoid a lawsuit

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 do you limit the possibility of a lawsuit to ensure business continuity?

No one can control every eventuality, but there are five actions you can take today to protect your company from being sued tomorrow.

Key Takeaways

  • As a business owner, it's your responsibility to do everything within your means to limit risk and to keep the business running smoothly.
  • It's wise for a small business to have an attorney on retainer.
  • Owners and their employees should avoid making libelous public pronouncements or conducting business that might be considered questionable.
  • Putting your business into a trust or incorporating it can help protect your personal assets in the event your firm is sued.
  • All businesses should obtain appropriate liability insurance and take steps to protect their computer systems from attack.

1. Watch What You Say and Do

The image of your business is critical. That's one reason why owners and their employees should avoid making any public announcements or conducting any business that might be considered questionable. That includes libelous or potentially slanderous statements, but it also means not doing business with unscrupulous individuals.

You may not think that working for a group of individuals known for shoddy business practices would be problematic because you know your company's ethics are above reproach, but if they are exposed, your company's name could be linked to them in the fallout.

You and your employees should also try to limit any possible conflict of interest and avoid situations where one may present itself. Situations such as these can damage your integrity as a business owner and could land you in legal hot water.

Sitting on the town council and helping pass an ordinance that benefits your business, for example, would be a conflict of interest, even if you didn't decide with any benefit for your company in mind.

2. Hire a Competent Attorney

When starting up your business, interview attorneys so you have legal counsel on standby. You may need a lawyer to advise you before you take an action—or to recommend the steps to take if you've been sued.

It's a good idea to retain an attorney who is familiar with the local laws and customs in the area in which the business operates and has expertise in a particular field, if necessary. If your company anticipates legal challenges from the Internal Revenue Service (IRS) or a state department of taxation, it may make sense to hire a tax attorney.

There are several potential resources to help you find a good attorney. Professional references from other business owners can be a helpful avenue to pursue or you can consult professional organizations to which the company belongs (such as the local chamber of commerce or any sector association). Of course, you can always try cold calling (and interviewing) from the phone book.

3. Separate Yourself From Your Business

Many entrepreneurs own and operate their businesses as sole proprietorships. This can be problematic in the event the company is sued because the owner's individual assets (for example, cars or a home) are fairly easy to attack or attach in a court of law.

One way to limit the possibility that an 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 properly established trust owns a business 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 is another means of separating 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? You have to understand and keep up with the additional laws, reports, and taxes that the government requires for a corporation.

4. Insure Yourself

All businesses should obtain liability insurance—just in case, for example, a customer slips and falls in your place of business. Certain professionals, such as insurance agents and consultants, should also consider obtaining errors and omissions insurance (E&O) to ensure their business is protected in the event that a customer or client accuses the owner of making an error or not living up to a contract.

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

In addition to purchasing insurance, you can build liability protection into your contracts. If an act of nature, a specific supplier, or some other uncontrollable act could make it impossible for you to fulfill a contract (thus exposing you to legal action), you should include in that contract that you are not liable for incomplete work due to these factors.

Discussing with your lawyer the possible clauses and legal phrases you will need in your work contracts can reduce your need for a lawyer later on in your business venture.

5. Protect Your Files

Most businesses these days work extensively on computers, which requires emphasizing the safety of your computer system. Businesses need updated antivirus and other types of security software loaded and activated on their systems.

If a virus were to bring down a computer system, it could cause a business to be unable to perform certain contracted work. Also, key files could be lost or stolen, which could then lead to legal action from clients and/or suppliers.

Make sure you have a set of backed-up files to refer to in the event of a massive technological breakdown. This could mean performing daily, weekly, or even monthly backups, and making your clients aware of the ones you employ.

If you keep these files at your place of business, store them in a fireproof safe. Or store them off-site to ensure your company's continued safety. Should the very worst happen to the rest of your materials and supplies, your backups would be protected.

In the event of a disaster such as a hurricane or fire—or a pandemic, as we've now learned—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/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 forces of nature throw you a curveball.

What Percentages of Small Businesses Get Sued?

Approximately 36% to 53% of small businesses are sued every year and 43% are threatened with lawsuits. It is estimated that 90% of all businesses are sued at least once throughout their life span.

What Should I Do If My Business Is Sued?

If your business is sued you should first contact a lawyer and your insurance company. It is advised not to represent yourself, to respond yourself, or to ignore the complaint altogether. An experienced lawyer in the matter will help guide you through the process.

What Has Been the Biggest Lawsuit Against a Business?

The lawsuit against the tobacco industry has been one of the largest lawsuits against a business. In 1998, large tobacco companies, including Phillip Morris and RJ Reynolds, agreed to a $206 billion settlement. Part of this included covering medical costs related to illnesses brought on by smoking.

The Bottom Line

Business owners are responsible for protecting their companies and their personal assets in the event of a lawsuit. With these five actions under your belt, your business should be in a stronger position to avoid legal action—or to confront it and come out unscathed.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. The Zebra. "Small Business Statistics in 2021."

  2. GJEL Accident Attorneys. "The Largest Class Action Lawsuits & Settlements."

Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.