Owning a small business comes with many rewards, but it also carries risks. One of the biggest risks is lawsuits. Legal claims can drain your finances, damage your reputation, and even force you to close your doors. While you cannot always prevent legal issues, you can take steps to reduce the risk.
By following smart business practices, you can protect yourself and your company from unnecessary legal trouble. Here are six key strategies to safeguard your business from lawsuits.
1. Separate Your Business and Personal Finances
The structure of your business can determine your level of personal liability. Choosing the right business structure can help protect your personal assets.
Here are the most common small business structures:
A sole proprietorship is the easiest to set up but offers no personal liability protection. If your business is sued, your personal assets such as your house, car, and savings could be at risk. A business owner’s policy can help provide some protection.
A limited liability company, also called an LLC, protects personal assets from business debts and lawsuits. However, LLC owners are responsible for self employment taxes.
A partnership is a business shared between two or more owners. General partners are personally liable for business debts, so having a general liability insurance policy is crucial.
If you operate a sole proprietorship or partnership, consider upgrading to an LLC or another structure that limits personal liability.
2. Keep Written Agreements and Maintain Records
Having clear and well-documented agreements is one of the best ways to protect your business. If a dispute arises, proper documentation can serve as proof of the terms and conditions agreed upon.
A records management plan can help ensure that you keep necessary records organized and up to date. Consult an attorney to determine which contracts your business needs. Some of the most important ones include:
Employment contracts which outline job roles, wages, and terms of employment.
Sales and supplier agreements which detail products or services exchanged, including prices and deadlines.
Non disclosure agreements (NDAs) which provide legal protection for confidential business information.
It is also essential to maintain records in key areas such as:
Employee records which include work authorizations, payroll documents, performance reviews, and disciplinary records.
Tax documents such as receipts, purchases, and employment tax records. These should be kept for at least four years.
Business agreements which include articles of incorporation, business licenses, and corporate financial records.
Transaction records such as invoices, receipts, paid bills, and bank statements.
Maintaining electronic records is just as important as keeping paper copies. Digital documentation can save space and allow for quick access when needed.
3. Protect Your Reputation
Your business reputation is one of your most valuable assets. Trust is crucial. If customers, employees, or business partners lose confidence in your company, lawsuits may follow.
To safeguard your reputation, always honor commitments. If you promise something, deliver on it. Be honest in marketing and avoid misleading statements about your products or services. Treat employees and customers fairly. Discrimination, harassment, or poor service can lead to legal claims. Resolve complaints quickly before they escalate into legal disputes.
A solid reputation reduces legal risks and strengthens customer loyalty.
4. Follow Employment Laws and Best Practices
Many business lawsuits stem from employment disputes. To avoid legal trouble, ensure that your business complies with federal and state labor laws.
Key areas to focus on include workplace policies that address discrimination, harassment, and employee privacy rights. Provide employee training to educate staff on proper workplace behavior and legal responsibilities. Keep accurate payroll records to ensure employees are paid fairly and according to labor laws.
Employment Practices Liability Insurance can provide protection if an employee sues for wrongful termination, discrimination, or harassment.
If you are unsure about employment laws, consider hiring a human resources consultant or an employment lawyer to help keep your business in compliance.
5. Have a Trusted Lawyer on Call
Legal issues can arise unexpectedly. Having an experienced lawyer available can help you address problems before they turn into lawsuits.
A good business lawyer can advise on contracts and agreements, ensure compliance with laws and regulations, and help resolve disputes before they escalate.
To find the right attorney, check the American Bar Association’s lawyer referral directory. Ask for recommendations from other small business owners. Look for nonprofit legal services if your business is just starting out.
Hiring a lawyer before facing legal trouble can save you significant time and money.
6. Get the Right Business Insurance
Even with the best legal precautions, lawsuits can still happen. Business insurance can help cover legal costs and protect your company from financial ruin.
Key types of business insurance include general liability insurance, which covers claims related to bodily injury, property damage, and advertising injury. Commercial auto insurance protects company vehicles and employees in case of accidents.
Professional liability insurance helps businesses that provide services or advice by covering claims of negligence or errors. Umbrella insurance provides additional coverage beyond the limits of other liability policies.
If a legal claim is filed against your business, report it to your insurance company immediately. Quick action may help resolve the issue before it escalates into a costly lawsuit.
Lawsuits can be costly and stressful, but you can reduce your risk by following best practices in record keeping, employment policies, and business structure. Most importantly, having the right insurance coverage and legal support can give you peace of mind.
Protect your business today by consulting with a lawyer and an insurance professional to ensure you are fully covered.