Take the proper steps to protect your business from lawsuits

Key takeaways:

  • If you don’t take the steps to protect yourself, you could lose your business.
  • Protecting your business includes complying with labor and tax laws.
  • Setting up the proper business entity can prevent you from having personal liability.
  • Failure to document agreements can result in lawsuits, as will a lack of a privacy policy and terms and conditions for your products and services.
  • Without insurance, you could lose your business in a lawsuit.

As a business owner, you’re pulled in a lot of directions. You’re focused on everything from marketing to inventory and you work hard to make sure your company is a success. However, it’s those things you don’t think about that come back to bite you, and among them are the legal considerations of owning and operating a business.

Small businesses are sued every day unfortunately and if you don’t take the proper steps, you could be sued too. A survey by the Small Business Administration revealed that in any given year, 36% to 53% of businesses face a lawsuit, while another study found that 43% of small businesses said they have been threatened with one. Many lawsuits are settled out of court but if your case goes to trial, you’re looking at a bill that comes in anywhere from $3,000 to $150,000.

These statistics make it extremely important to protect yourself and your business from legal problems that could not only cost you money but your entire business. Let’s take a look at some of the common mistakes small businesses make that can lead to litigation.

1. Did not use an attorney

You might think lawyers are expensive but they are nowhere near as costly as a lawsuit. Hiring a lawyer before you launch your business to figure out what insurances you need, what entity you are, and other details can save you a lot of money down the road.

2. Did not set up the right business entity

There are several ways to set up your business – as a sole proprietor, an LLC, an S Corporation, a partnership, or a corporation. This is where an attorney comes in handy. All of these entities have their own risks and protections. For example, if you are a sole proprietor, you are considered with your business as a single unit. On the other hand, corporations and other entities offer protection for your assets.

3. Failing to document agreements

To avoid conflicts that end up in court, documented agreements are essential. These include agreements between partners, contractors, and vendors. In your agreements, identify each party, their obligations, how you will resolve disputes, and what can trigger termination of the agreement. Your partner or supplier may be your best friend but that oral agreement or handshake is not enough to protect you when things go sideways.

4. Not adhering to employment laws

This is a biggie. Not only could you be sued by an employee or independent contractor but you could also be fined for violating employment law. The most common violations include wrongly classifying an employee or independent contractor, not paying required overtime, paying less than the minimum wage, failing to make sure a workplace is safe, and not covering injuries on the job. Your business is also vulnerable if you violate statutes such as the Title VII of the Civil Rights Act, Americans with Disabilities Act, and various anti-discrimination laws. You also are required to have certain documents on file for each employee.

5. Lack of terms and conditions

Your terms and conditions tell customers how to use your product or services as well as the customer’s end of the bargain – you tell them how to use your product properly and they agree to do that. Use a checkbox that a customer must check before placing an order, otherwise, you are leaving a loophole that can lead to a lawsuit. 

6. No privacy policy

A privacy policy is required by law, which means your customers have the legal right to know if you do or do not share their personal information. Non-compliance can lead to up to a $100,000 fine and a potential lawsuit from the customer or customers. 

7. You didn’t follow business tax laws

Yes, taxes can turn into a legal matter if you don’t follow the law. Taxing entities can put liens on your property, force you to liquidate, or any number of unwelcome outcomes if you don’t properly comply. 

8. No protection of intellectual property and no copyrights or trademarks

If someone decides to use your business name, copy an exclusive product, or hack your computer system and steal code on that great software or app you created, you’re out of luck if you haven’t protected them. 

9. You have no business insurance

Certain insurance, like workers’ compensation, is required by federal law, and many states require that you have a liability policy. Even with the most well-run business though, things happen. Customers slip and fall, a delivery driver damages some property, a faulty product got through the quality control process, or you’re sued by an employee. If you don’t have insurance to help pay for these possible scenarios, you could see yourself shutting your doors. 

Other than worker’s compensation, depending on your type of business, you might need the following insurance:

  • General liability
  • Professional liability
  • Commercial property
  • Commercial auto

Other policies include loss of income, employment practices liability, and commercial umbrella insurance.

10. You lack an advisory team

One of the smartest things you can do is to build a team of professional experts who can advise you. This includes a bookkeeper, a CPA, a financial advisor, a banker, a lawyer, and an insurance professional. Form this team before you start your business or if you’ve already launched, fill in the gaps with people you trust – they will help ensure your business is successful, lawsuit-free, and solvent.

If you find you’ve committed any of these mistakes, it’s not too late. Build your team, choose the appropriate business entity, formulate needed policies, and make sure that all of your employee-related matters are compliant.

Protect yourself with Avante

Avante Insurance is an independent insurance agency that works with the most reliable insurance companies in the business to get you the exact coverage you need. Our team will work with you to determine what insurance is best for your unique business and find the perfect solution to protect you from lawsuits and other business pitfalls. Contact us for more information or to receive a no-obligation quote.

This blog and website are made available by the publisher for educational and informational purposes only. It is not to be used as a substitute for competent insurance, legal, or tax advice from a licensed professional in your state.