Tips for Preventing Small Business Lawsuits

The impact of a lawsuit on your business will go beyond finances: Lawsuits are stressful, time-consuming, and unpredictable. But there are things you can do that will dramatically decrease the chance that your small business will end up in court. Here are five tips.

1. Put it in writing, and keep your end of the bargain

There are a lot of “handshake deals" in small business. But when you don't put things in writing, you leave the door open for misunderstandings that can escalate into lawsuits.

For every transaction, create a written document that specifies the most important terms of the deal, like price, delivery dates, and what services or products you will provide. You might not want a long, formal contract for every transaction, but you should at least have an email, estimate sheet, or other document showing what you have agreed to. A business lawyer can advise you on the types of contracts you need for your business.

Once you've made an agreement, the best way to avoid being sued is to do what you said you would, when you said you would. And be honest and ethical in all your business dealings.

2. Follow sound employment policies

Your small business may be subject to many employment laws, including wage and hour laws, safety regulations, and laws intended to eliminate workplace harassment and discrimination. If you violate these laws—even unintentionally—you can end up in an expensive and emotionally draining lawsuit.

The key to minimizing the chance of an employment lawsuit is to know the employment laws that apply to you and to create and enforce policies to help ensure you are in compliance.

Many small business owners find it helpful to hire a human resources consultant or an employment lawyer to prepare an employee handbook and advise on proper hiring and termination procedures.

3. Communicate clearly and regularly

Sometimes things go wrong through no fault of your own. Supplies don't arrive on time, you get the flu, or you discover an issue that will make a project take longer and cost more than you expected.

When you hit a bump in the road, explain the issue to the people you're doing business with, and work with them to find an acceptable solution. If you communicate verbally, follow up with an email so you'll have a written record.

4. Find an experienced small business lawyer

Every business owner has moments where the wrong decision could put you in the path of a lawsuit. What's the right way to fire an employee? How do I handle this unhappy customer?

If you have formed a relationship with a business lawyer, you have someone you can call for advice when you need it. Your investment in a few minutes of a lawyer's time could save you thousands in legal fees.

5. Get the right liability insurance

Liability insurance can cover a myriad of risks—from someone slipping and falling in your store to a major data breach. Insurance minimizes the chance you'll be sued because there is money to pay for losses, and insurance companies are experienced and efficient at investigating claims and negotiating settlements. If a claim still leads to a lawsuit, the insurance company will handle the case for you.

There are several types of liability insurance. A small business insurance agent can help you find the right policies to protect you and your business.

Even if you do everything right, you can't make your business completely lawsuit-proof. But you can take some extra steps to minimize the impact if you ever are sued. Liability insurance is one of them. Another is to form a business entity such as a corporation or LLC. A business entity limits your personal risk if your business is sued—you might lose the money you have in your business, but your own assets such as your house, car, and personal bank account will be safe.