Protecting Your Small Business from Liability

Protecting Your Small Business from Liability

Protecting Your Small Business from Liability

All too often, business owners learn about legal liability the hard way. Running a successful business is hard, but add a threatening email, letter, or lawsuit, and you can almost guarantee sleepless nights worrying about expensive legal fees. 

Legal threats are more common than you may realize, and waiting until you get that letter or email may leave you with few options. 

That’s why it’s so essential to take steps to protect your business from liability before these problems arise. 

Here’s how. 

What Are the Most Common Types of Small Business Lawsuits?

As a business lawyer, Amira Irfan, Esq. has seen many small business owners struggle with various legal issues. “While every business is unique,” she says, “there are certain types of lawsuits that seem to occur more frequently than others. 

For example, the most common types of small business lawsuits are related to breach of contract disputes, employment disputes, privacy violations, intellectual property violations and infringement, and more.” 

The most common types of small business lawsuits include:

  • Bad debt/late payments
  • Breach of contract/contract disputes
  • Customer discrimination
  • Employment discrimination
  • Harassment
  • Intellectual property disputes (IP)
  • Partner disputes
  • Personal injury
  • Shareholder disputes
  • Unsafe premises
  • Vehicle accidents (business cars or trucks)
  • Wage and hour disputes
  • Workplace injuries

And this isn’t a completely exhaustive list. The scenarios you may deal with depend in part on your business. A real estate investor has to worry about accidents that occur on one of their properties (like slip and fall accidents) while a work-from-home online business owner can encounter copyright infringement or other IP-related lawsuits. 

That’s one reason why it’s important to get good advice from both an attorney and insurance agent who can help you understand the specific steps you need to take to protect your business from unexpected events that can result in unexpected financial losses. 

What Steps Should a Small Business Take to Protect Itself From Lawsuits?

Irfan suggests several ways to help protect your business from lawsuits, including “ensuring their websites are legally compliant with proper policies in place, using proper contracts while working with others, having proper business policies and procedures in place, maintaining insurance coverage, and (keeping) good relationships with customers.”  An entrepreneur herself, she offers a variety of resources and legal templates on her website

Several of the key steps to helping protect your business include:

  • Set up a formal business entity and maintain it as a business.
  • Keep accurate records (financial, contracts, correspondence, etc.).
  • Separate business and personal finances.
  • Get adequate business insurance, and review coverage regularly.

Because employment-related lawsuits are common, it’s essential that you get professional human resources advice if you hire employees. You need to understand state and federal employment laws and make sure you set up policies and procedures to protect your business. 

If your business is small, keep in mind that some payroll solutions offer HR resources as an add on, and it’s a good idea to find an attorney who can help you with employment-related issues. 

And because contract disputes are common, consulting a small business attorney for contracts and legal advice to head off problems before they start. Factor this cost into your business expenses. After all, if you can’t afford to consult with an attorney, you probably can’t afford legal fees if your business is sued.

Read: 15 Steps to Make Your Business Legit

What Are Some Common Types of Business Insurance?

Your business may need several types of small business insurance coverage, depending on the type of business you operate. These may include:

General liability insurance

One of the first types of insurance most businesses consider, it can cover physical injury or property damage from business operations or in the business location, or personal injury from business communications (for example, libel).

Professional liability insurance

This type of insurance policy (also referred to as errors and omissions insurance) covers the cost of defending against a complaint or legal action about your business services or performance, such as inaccurate advice, negligence or misrepresentation. 

Product liability insurance

If your business manufactures or sells a product, this insurance can cover the cost of legal defenses in the event of a lawsuit or complaint because your business is alleged to cause injury or illness, wrongful death or property damage. 

Cyber Insurance 

 Data breaches and cyber attacks are a growing threat for small businesses. This insurance can help cover the cost of alerting and compensating customers, paying fines and legal costs, and PR expenses. 

Worker’s Compensation Insurance

If you have employees you’ll need worker’s compensation insurance as it’s required in most states. This can provide coverage for workers who are injured or become ill on the job, including coverage for medical expenses, lost wages and disability benefits, and employee lawsuits.

Commercial property insurance

This can help replace property such as a building, equipment, and products or inventory, after theft or damage.

Commercial auto insurance

If you or your employees drive vehicles in your business, this insurance provides coverage for vehicle and property damage and bodily injury. 

What Is Employment Practices Liability Insurance?

Employment Practices Liability Insurance (EPLI) includes coverage that can help cover the defense costs and damages that arise from employment-related claims. These may include wrongful termination, discrimination (age, gender, race, pregnancy, disability, for example), retaliation, and workplace harassment claims. 

It can also provide coverage for defense costs and damages from wage violation or personal injury lawsuits. 

Along with other crucial types of business insurance, EPLI is essential if you have or will hire employees. 

How Can You Limit Liability in a Partnership Agreement?

Partner disputes can easily sink a business, so it’s essential you take steps to protect yours if you decide to partner with other individuals or businesses. 

Never work on a handshake

“It’s crucial to have a partnership agreement that clearly defines each partner’s roles and responsibilities, incorporate indemnification provisions to shield partners from liabilities due to co-partners’ actions, and maintain adequate insurance coverage,” says Susan Nilon, JD, founder of The Stress-free CEO

Irfan also recommends clearly defining responsibilities and “limiting the scope of those responsibilities. This helps ensure that each partner is only liable for their own actions or decisions within their designated role.”

“Another way to limit liability is by including clauses for indemnification and holding harmless agreements,” Irfan suggests. “These clauses protect partners from being held personally responsible for any damages or legal issues that arise from the partnership’s business activities.”

Have an exit plan

If things don’t work out, you want a clear exit strategy that’s fair to all parties. “The agreement should also include a comprehensive dissolution plan for handling liabilities upon partnership termination,” Nilon advises. “This agreement should be updated and reviewed annually with legal counsel to make sure it is compliant with state laws and best practices.”

How Do I Protect My Personal Assets in a Lawsuit if I Am the Business Owner?

If you want liability protection for your personal assets, you’ll need to be proactive. Waiting until you or your business is being sued will likely be too late as most of these steps can’t be taken retroactively. 

One way to protect your personal assets from your business is by forming a legal business entity such as a Limited Liability Company (LLC) or corporation. 

Operating under a legal business structure can help limit your personal  liability. A sole proprietorship is not a legal entity—there is no separation between you and your business if you operate that way. 

Forming a business entity is not enough, though. You need to make sure you maintain it by operating as a business. Use a business bank account, not a personal account. It’s also helpful to use a business credit card rather than a personal credit card. Commingling business and personal finances can put your legal entity at risk. 

Establish business credit so you can borrow in the name of your business and move away from personal guarantees for certain small business loans and financing. 

A business entity alone is not enough. Talk to an insurance agent or insurance agency to find the right insurance for your business needs. 

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