The Science of Not Getting Sued: 4 Tips for Small Business Owners

October 12, 2015

12:30 pm

As an entrepreneur, it’s your obligation to do every little thing within your power to limit threats and liabilities, and also to keep your business running smoothly. One of the ways to do that is to take reasonable precautionary steps that ensure your business is not exposed to legal risks.

A lawsuit can take a toll on your revenue, eat up your time, harm your reputation or even kill your business. Homejoy was a fine company that had to shut down because of some lawsuits it went through.

In the words of content marketing expert Neil Patel:

One of the toughest parts about my entrepreneurial journey very few people know about was spending a year fighting a class action lawsuit (it’s just a fancy word for multiple lawsuits combined into one) and the Federal Trade Commission.

So if you’re still thinking lawsuits for businesses are isolated events, think again. They happen more often than you can imagine.  With that in mind, there are some proactive steps you can take to protect yourself.

1. Have a competent legal team

There are many legal questions to answer and decisions to take about your business. What type of business structure should you choose (sole props, LLCs, S-corps)? How should you protect your goods and services? How should the terms of contract between you and your workers, vendors and contractors be like? Should your workers be employees or independent contractors? What data should you take from your clients and how can you protect them?

My guess: you’re clueless about the right answers to some of these questions in your particular situation. So what do you do?

Simple. Hire a professional. Cindy Best, CEO of a firm of lawyers in Scottsdale advises:

When starting a business, it’s smart to get the help of an attorney that’s licensed to practice law in your state and also has expertise in your area of business. And if you missed that step when you started your business, the best time to set things right is now, not when you run into a legal trouble.

2. Make your business a separate legal entity

Most entrepreneurs run their companies as sole proprietorships. The problem is that if they get sued, their personal assets – think of their cars, or houses – are all too easy to attach or seize in a court of law.

As a smart business owner, you should not go this route. Instead, get your business registered as a separate legal entity. This makes your business capable of filing its own income tax returns, owning its own assets and answering suits in its own name. This restricts the chances of your personal property being confiscated in the event that your business runs into a legal trouble.

3. Insure your business

Ever asked yourself what would happen if a customer slips and falls in your place of business because your floor tiles has no friction? Or if one of your company drivers hits a pedestrian while working for you, breaking the latter’s arm? Or if a customer sues you for making some sort of errors, or not living up to a contract?

Well, even if it’s no fault of yours, you might be liable. So how can you protect yourself against unforeseen accidents caused by human errors or omissions?

Simple! Get your business liability insurance. There are different types of insurance, so you need to seek the help of professionals to know which ones would be good for your business.

4. Be cautious in your writing and speech

Aside from the insurance, it’s smart to insert protection clauses in your contracts. If an act of nature or some other acts beyond your control makes it impossible for you to fulfill a contract (and thus open yourself up to legal action), then you’ll be covered.

Also be careful of the representations you make to your clients while discussing with them. It’s all too easy to make false representations about your service when you’re closing a deal but resisting the temptation would save you from legal troubles, and also protect your reputation.

Business owners have the obligation to protect their business and their personal assets. The law is your friend, provided you’re cautious and proactive. You want to be on the side of the law before a dispute arises.

(Disclaimer: Just in case you didn’t already figure it out, I’m not your lawyer. This post is for informational purposes only and should not be construed as legal advice of any kind.)


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Abdullahi Muhammed is a writer, difference maker and entrepreneur. He is the founder and CEO of Oxygenmat and he writes for Forbes, Entrepreneur, The Huffington Post and a few other sites.

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