3 Ways to Protect Your Business From a Lawsuit

Starting and owning a small business comes with countless worries and concerns. Although this venture may be a rewarding fulfillment of a lifelong dream and/or the profitable business that leads you to financial success, it also comes with a number of additional responsibilities and risks.

One possibility that could put you, your employees and your company at risk is a potential lawsuit.

Attorney discussing a lawsuit with a client

Lawsuits can occur for any number of reasons, from any number of causes. While your coffee shop may have the obvious potential of an unfortunate slip and fall accident, a lawsuit could also come from an unfulfilled contract or even an association with a vendor that comes under legal fire. There is rarely any such thing as a predictable lawsuit, and legal action always seems to come from unexpected– sometimes unavoidable– circumstances or actions.

With that being said, you need to understand the basic and practical ways to protect your small business from a potential lawsuit. Although a suit may come from an unexpected, unpredictable occurrence, you can still be properly prepared for such possibilities.

The following strategies are designed to help you do just that and put in place the right protections in case the worst happens.

1. Hire a Lawyer

Some aspects of starting a new business are obvious, even to first-time entrepreneurs. You must develop a profitable business model, secure funding, file the necessary paperwork, establish a location and take all of the obvious initial steps. However, one key element that first-timers often overlook is the hiring of necessary legal representation.

You should begin to interview attorneys and have a legal contact in place immediately upon opening. This person will not only be there in case of a lawsuit or other worst case scenario, he or she will also be able to provide other counsel and advice that can be invaluable for new business owners. It is best to find someone who specializes in the representation of businesses within your specific industry.

Meeting with insurance client

2. Get Insurance

In addition to proper legal counsel, you should secure the necessary liability insurance for your business well before setting up shop. This can be the most critical– and most basic– protection that you can have in the case of a lawsuit, accident or other potential problem. Aside from basic liability coverage, some professionals and entrepreneurs may require additional, industry-specific insurance to cover errors and omissions, malpractice or other issues that may be common in their fields.

3. Separate Yourself

Many small businesses are established as sole proprietorships, especially in the case of independent entrepreneurs. While this type of ownership has its benefits, it also puts you at personal risk if your business is ever faced with a lawsuit. Without protection, your personal assets could be subject to attack and seizure if your company does not have the assets to pay damages in a suit.

The simplest solution to this is to set up a trust. A trust is a legal device that essentially acts as its own entity– filing its own taxes, owning property, etc.– and can be used to own your business without having a legal connection to your personal belongings. Another option would be to incorporate, which can also provide similar protections, as well as additional benefits for growing companies.