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

As a business owner, you likely do everything in your power to limit risk and keep your business running smoothly. But no one can control every eventuality, including the possibility that you might one day face a lawsuit. However, there are some actions you can take today to protect your company from being sued tomorrow. Here are five important ones.

1. Watch What You Say and Do

In conducting your day-to-day business, you and your employees should be careful about making any public statements that might be construed as libelous or slanderous. Similarly, doing business with possibly unscrupulous individuals, even if your behavior is totally above board, could get you caught up in a situation resulting in a lawsuit.

You and your employees should also try to avoid any potential conflicts of interest. Even the appearance of a conflict of interest can damage the reputation of your business and land you in legal hot water. For example, sitting on the town council and helping pass an ordinance that benefits your business would seem to be a conflict of interest, even if you didn't cast your vote with any benefit for your company in mind.

2. Hire a Competent Attorney

It's always a good idea to have legal counsel on standby. You may need a lawyer to advise you before you take a particular action—or to recommend the steps to take if you happen to be sued.

You'll be best served by an attorney who is familiar with the local laws and customs where your business operates. If you anticipate legal challenges from the Internal Revenue Service (IRS) or a state tax department, it may make sense to hire a tax attorney.

If you don't already have an attorney, ask other business owners for referrals. You can also solicit recommendations from any professional organizations you belong to or your local chamber of commerce.

3. Consider Your Business Structure

Many entrepreneurs own and operate their businesses as sole proprietorships. This can be risky if your business is sued because an 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 your personal assets will 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 the business 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.

Establishing your business as a limited liability company (LLC) or S corporation can also create a shield between your personal assets and your company's liability in the event of a lawsuit. The downside is that LLCs and S corps are more complicated and costly to set up and run than sole proprietorships.

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 if a customer or client accuses the owner of making an error or not living up to a contract.

In addition to purchasing insurance, you can build liability protection into your contracts. If an act of nature, a particular 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.

5. Protect Your Files and Computer System

Most businesses these days work extensively on computers, which requires taking the necessary steps to protect your data from prying eyes. That means, for example, installing antivirus and other types of security software and keeping them up to date.

If a hacker or virus were to bring down your computer system, you could be unable to perform work you have contracted for by the agreed-upon deadlines. Also, key files could be lost or stolen, which could lead to legal action from clients and/or suppliers whose information has been compromised.

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 monthly, weekly, or even daily backups and storing them safely in another location.

The Bottom Line

Small business owners can protect themselves against the potentially catastrophic financial consequences of a lawsuit by taking some basic preventative measures beforehand. Even if they are unable to able to eliminate the risk entirely, they will be better positioned to deal with a lawsuit should one ever happen.