Is the threat of a lawsuit a real fear?

As a small business owner, you may be one of the 48% concerned about frivolous or unfair lawsuits. According to the US House Law Reform Institute, existing laws and fear of lawsuits cost US small businesses $98 million in 2005. That number may seem large because it includes the money spent on damage awards, settlements, legal costs, liability insurance premiums, and costs incurred by insurance companies on behalf of policyholders. Is the fear of lawsuits a real fear? Unfortunately yes. Anyone can sue anyone for anything at any time. In fact, 46% of small business owners have been threatened with a lawsuit, 34% have been sued in the last 10 years, and 62% have made business decisions to avoid lawsuits. In fact, small businesses bear 69% of the total cost of the wrong system for all US businesses.

What is the best course of action?

What should a small business owner do? For starters, keep in mind that the best defense is a great offense. While most small business owners fear the law, it’s much smarter to use the law as a protective shield. There are many business and legal components that go into creating the strongest possible shield: business entities (the type of structure that governs your business), insurance, and intellectual property (copyrights, trademarks, patents, and trade secrets), to name a few. .

As a former full-time practicing attorney and now a small business owner, I have been on both sides of the fence when it comes to the legal issues a business owner can face. It is imperative that entrepreneurs understand the basics of the legal side of running a business and how to use the law as a shield to protect themselves and their business.

Create a shield through the business structure

The first thing a small business owner needs to consider is the structure of the business. There are 4 basic types of business entities: sole proprietorship, partnership, corporation, and limited liability company. A common misconception of small business owners is that the business entity itself always creates a legal shield. In some cases (a corporation or limited liability company, for example), this is generally true. However, if you are a sole proprietor (and, if so, you are not alone, as 78% of all small businesses in the US are sole proprietors), then you essentially have no protection. As a sole proprietor, you are personally responsible for all business debts and other obligations. Fortunately, the law is not the only way to create a shield to protect your business. If the business entity itself does not provide a shield, you can create one by purchasing adequate and adequate insurance coverage. Therefore, a sole proprietorship that is adequately protected by insurance can have an effective shield.

In the case of partnerships, another misconception is that the partnership is a separate legal entity that provides a shield. A partnership is essentially a sole proprietorship run by two or more people. Therefore, the structure itself does not provide protection. Again, insurance can be used to fill the gap and/or a different business entity can be chosen. For example, did you know that you can create a corporation and the same two people who would have created a partnership will now be shareholders? What about a limited liability company with more than one member? There are many ways for two or more people to own a business together. Carefully consider which makes the most sense, not only from an operations and decision-making standpoint, but also to gain the most legal protection for the owners involved.

Even with corporations and limited liability companies, there are limits to the strength of the shield. Simply creating a business entity is not enough. The business must be operated as a separate legal entity, which includes refraining from commingling personal and business funds, keeping personal guarantees on behalf of the business to a minimum, maintaining corporate/business records, and paying taxes related to the business. If the business entity is a sham or the owner is not following the rules in terms of maintaining the business shield, a court may apply the legal doctrine of “piercing the corporate veil” if the business is sued. Piercing the corporate veil allows a litigant to pierce the business structure and personally get to the owner. Of course, piercing the corporate veil only applies in very limited situations, but it should be used as a reminder to maintain that shield at all times when it comes to operating your organization business as a separate legal entity.

Create a shield through a written customer agreement

When you agree to perform services for a client, and the client agrees to pay you for those services, you and your client have entered into a legal contract. The terms of the contract, however, are difficult to remember and prove unless they are in writing. A written contract is critical as it informs customers of business terms and policies, sets a professional tone, promotes policy consistency, and is legally enforceable in court (the decision to sue a customer to enforce a contract is, of course, a business decision, as well as a legal decision, and should be carefully considered). The contract therefore helps avoid misunderstandings and clearly defines the expectations of the parties.

Some business owners choose not to use contracts out of fear that a written agreement may be too formal or legal in nature and thus may turn off a client. Again, this is a business decision to consider, and you should determine if this is a real or imagined fear by reaching out to your customers to test the waters. You can also use a “letter of agreement,” which can be less intimidating to clients. In the corporate setting, a written contract is generally expected. Another disadvantage of using a written contract is the cost of creating and advising if you use an attorney. While there are standardized contract forms available online and in books, be careful not to accept such standardized forms as carte blanche. I often see small business owners fail to tailor contracts properly, leading to embarrassing typos, inappropriate clauses, and general confusion. Not only does this look unprofessional, but in extreme cases it can also result in the contract being unenforceable in court. Therefore, it is a good idea to have a business attorney review the agreement to ensure that it adequately protects you, contains the relevant terms, and meets the objectives that he wishes to achieve. It is an expense worth paying to ensure adequate long-term protection.

A word of caution: stay away from “legal jargon.” Use plain language to make the agreement easy to understand and help, rather than hinder, understanding between you and your clients. If you use a customer agreement, here is a list of sample clauses you should consider including:

• Definition of the parties (define your status as an independent contractor if the contract is for a corporate organization);
• Services to perform;
• Code of ethics of your professional association, if applicable;
• Confidentiality;
• Pricing and payment policies (pricing structure, hold guidelines, travel time or expense, charges for supplies or products purchased on behalf of the customer, cancellation policy, payment due date, bad check fee, card acceptance of credit, payment of expenses, etc.) );
• Provision of materials, equipment and office space;
• Insurance coverage guarantee;
• State law governance;
• Permission to take and use photos for marketing purposes, if applicable;
• Term of agreement/termination of relationship

Now, go ahead with shields up!