New businesses often make mistakes regarding their taxes, whether failing to set aside enough money for federal income taxes or not properly handling tax withholding from employees’ paychecks. The legal problems that result from these mistakes, though, are well known and you can find many legal and financial experts to help you avoid them. However, even existing businesses are at risk from frivolous lawsuits that could wipe them out, and unlike routine issues like workers’ compensation, taxes and legal liability from data breaches, there is far less support for businesses to do anything except react after finding out they’ve been sued.
Here are some practical, actionable steps you can take to protect your business from frivolous lawsuits.
Limited Liability by Design
One of the best ways to protect yourself personally from frivolous lawsuits is to set up your business at the very start to limit your personal liability. A limited liability corporation requires somewhat more bookkeeping and legal paperwork than a sole proprietorship, but if someone files a lawsuit against your business, the worst thing to happen is closing the business – not losing your home and personal assets, too. Sole proprietorships are easy to set up and run, but the business owner has unlimited personal liability. C-corporations and S-corporations have significant limits on their liability, including limited liability for business debt by the business owners. General partnerships have broad exposure to liability, and all partners’ assets are at risk due to the misconduct of one partner.
Small business owners should also avoid saying they personally guarantee the work done by their employees. And don’t raid business accounts for personal use or use business property for personal projects or you risk tearing the corporate veil that these limited liability business entities provide.
Have Clear Policies and Follow Them
You can become the subject of a lawsuit if your business treats one person differently than another. Discrimination against a protected class is an obvious situation, but you can end up with accidental differential treatment because employees don’t know their policies. What happens if one person gets a full refund while someone else is told they can only receive store credit? You’re also open to a not-so-frivolous lawsuit if employees are giving friends and family extras or special discounts while the general public is subject to more restrictive rules. The solution is to have clear company policies and then train your employees to follow them. Train employees not to make promises on schedules, performance or discounts they cannot deliver or are not authorized to give.
Don’t forget to review your policies for needed changes. You risk problems if your old policies are in violation of new laws, whether regarding gift cards, comp time, refunds, or collection of personal information.
Consider going undercover at your business to see how employees treat customers and contractors. Disciplining or firing those who mistreat employees, customers or contractors when observed doing so helps protect the company from lawsuits that the firm didn’t do anything about.
Active Risk Management
An active risk management program can dramatically reduce your company’s risk of frivolous lawsuits. Someone reviewing your company’s policies can find the forms you need to fill out and terms to add to contracts to reduce the loopholes by which someone could sue you. A law firm like Marrone Law Firm is able to aid you with this.
A review of business practices could find that you need to clean spills up quickly to reduce the risk of falls, put up a sign in the parking lot saying you’re not liable for damage due to potholes, or mark the safe walking paths through the warehouse so no one is hit by a forklift. That is separate from firing anyone who violates safety policies, since doing so increases compliance by the remaining staff and reduces the ability of others to sue when hurt because you didn’t stop the dangerous behavior.
Document, Record and Archive
One of the best ways to protect your business from frivolous lawsuits is to document or record everything possible. News stories appear periodically of someone caught on camera messing with displays and creating the conditions that allow them to fake an injury so they can sue you. Cameras regularly capture employees stealing from the till or raiding the tip jar. By having the video and actually reviewing it as soon as concerns arise, you can protect yourself from he said, she said allegations and associated lawsuits.
When you have video evidence of someone stealing inventory or cash, you can fire them for cause and have some protection against a retaliatory lawsuit claiming sexual harassment or discrimination. Contact professionals to design human resources processes and collect the necessary information so that you don’t risk a lawsuit when you file someone for violating the law.
Record all communications with customers as well. Archived email requests for specific services and special accommodations are proof someone made the request, and your company’s responses can be seen as a contractual agreement to meet these needs. Whether you substituted cheaper ingredients to fit in a customer’s budget and end up violating dietary rules which trigger an allergic reaction, or shifted the scheduled arrival time, your email conversations about these issues are protection when the head of household sues you for changes you made at the request or approval of another family member. If someone requests changes verbally, document this conversation in writing in their price quote and have them sign the altered price quote.
Sometimes documentation proves there is miscommunication, but it proves that the issue is a failure of communication instead of malice or cost-cutting at the customers’ expense. Then you have the opportunity to mediate a mistake and come to a resolution instead of going to court.
Have Clear, Concise Contracts
One way to avoid lawsuits is to have clear, concise contracts that outline all party’s responsibilities and rights. Ensure that your contracts only have legally enforceable terms, reasonable expectations of all parties involved and don’t leave wiggle room on the interpretation of requirements on either side. Have all contract templates reviewed by a lawyer to prevent problems.
Strategically Use Your Insurance
One common mistake many small business owners make is under-insuring their business. They may have property insurance in case the building burns down but failed to insure the inventory and equipment inside. They sign up for the minimum of liability insurance and then don’t have the ability to pay out an expensive claim.
Too many home based businesses ignore liability insurance, wrongly assuming their homeowners’ insurance will cover anything that happens. No, it won’t, whether your client gets hurt tripping on the front steps or a thief steals equipment from your home office or garage workshop. Landlords often assume that their general liability insurance will cover people who trip on a sidewalk but don’t set up an umbrella insurance policy to cover the potential wipeout after a lawsuit because someone was shot on the premises or drowned in the apartment complex’s pool.
Don’t forget to make a list of all of your company assets and review the inventory periodically. You may not be able to file a claim for theft if you don’t notice it for six months, and you cannot file claims to reimburse you for a million dollars in destroyed inventory if you don’t have proof you had that much in your warehouse at the time of the fire.
Conclusion
Design proper insurance coverage to prevent the company from getting wiped out in case of a lawsuit. Have legally enforceable contracts reviewed by an attorney to prevent problems, and train employees not to take actions or make promises that may violate the law, customer expectations or contracts. Limit your company’s liability by its very legal structure. Set up clear company policies based on what allows your business to run safely and effectively. Finally, record and document as much as possible and then archive those records.
