At some point, almost every new client asks me a variation of the same question: “How can I keep from getting sued and losing my house, my car, my money, my spouse, my kids and my dog?”
The honest answer is: You can’t. In fact, the more successful you are, the more likely it is that you will one day have to deal with the hassle of defending a lawsuit.
Nevertheless, every business owner can take simple steps to reduce the risk of being sued. If you are sued, these steps can significantly increase your chance of victory in the courtroom and can protect your assets from risk.
Incorporate
Operating a business simply under your own name is a recipe for financial disaster. Forming a corporation, LLC or other similar business structure is crucial and will put up a solid wall between your business assets and your personal property.
Make certain your corporate name is featured prominently on your business cards, website, etc., and that you keep separate accounts for the corporation. Any experienced accountant or business attorney can help you choose the structure that is best for your business.
Buy insurance
This is easily the second most important step to increase protection and peace of mind. This may be commercial liability insurance or errors and omissions coverage depending upon the type of business.
I recommend that my clients procure as much coverage as they can afford, preferably at least $1 million. If you get sued, insurance will often cover both the cost of an attorney as well as any damages awarded. The premiums are usually tax deductible.
Transfer assets
As long as it is not being done for purposes of fraud, it is wise for a business owner to legally transfer key assets (such as a house) into the name of your spouse or other trusted family member who is not involved in the business.
Keep in mind, however, that you are truly giving up ownership, which could be an issue in the event of a divorce or other dispute.
Simplify contracts and use disclaimers
A simple contract written in easily understandable terms is more likely to be enforced than one containing a lot of “legalese.” Also, the use of disclaimers (such as limitations on liability and a lack of warranties) can offer valuable protection and should be a standard practice in your business contracts. Any skilled corporate attorney can review your standard contracts and make certain they are enforceable and provide you with maximum possible legal protections.
Put it in writing
Avoid oral agreements. The time and money spent drafting a written contract is miniscule compared to the expense of a lawsuit based upon a misunderstanding. Every agreement, invoice, financial transaction and even phone message should be written and safely preserved.
Know the law
While the sheer number of laws and regulations that relate to your profession may be daunting, making certain your business is compliant with the law is a powerful deterrent to litigation.
Consult with an attorney or spend time researching and reviewing the local, state and federal laws that apply to your business. Make certain you have obtained and filed all necessary permits, licenses, fees, taxes and registrations.
Communicate
Happy people don’t sue. Many lawsuits arise from simple misunderstandings and hurt feelings. If you find yourself in a dispute, try to deal with it quickly and professionally. Do not ignore the problem. A friendly telephone call or honest discussion can often lead to an amicable resolution.
Avoid crazy people
It never ceases to amaze me how often a client that has been sued tells me: “I knew that person was trouble from the moment I met them.”
Remember: You are not required to do business with every person that contacts you. Always trust your instincts. A tactful refusal such as “I am simply overbooked right now, and I know you need this work done right away” can avoid many future problems. And, of course, you can always refer them to your biggest competitor.
Charles Bowen is a business attorney who focuses on commercial, banking and manufacturing law and also offers comprehensive mediation services. He may be contacted at 912.544.2050 orcbowen@thebowenlawgroup.com.