Over 80 million lawsuits are filed every year in the United States. If you are in business, you should be thinking about the risks involved. The following are some of the most common pitfalls that lead to liability and lawsuits for small business owners and how to avoid them.
Pitfall #1: Doing Business as a Sole Proprietor
Most people who go into business do so as a “sole proprietor.” This means that they are doing business as an individual or a “d.b.a.” (doing business as). This scenario offers absolutely no asset protection, not to mention poor tax benefits. If the business is sued, all of the personal assets of the individual are at risk. For less than $100 in most states, you can form a corporation to do your business or trade. If properly maintained, a corporation will shield your personal assets if the business is sued or goes bankrupt.
Pitfall #2: Doing Business as a General Partnership
Doing business with a partner is even worse than doing business as a sole proprietor. If your partner does something foolish, you are liable. That right! If you allow your partner to commit the partnership to a contract, the partnership and its partners can be held liable for that debt. If your partner is negligent or incurs a debt on behalf of the partnership, you are on the hook – even if your partner files bankruptcy!
If you intend to business with partners, consider a corporation or other limited liability entity. It is just as easy to set up for two people as it is for one.
Pitfall #3: Using “Independent” Contractors
If you regularly pay “contract” employees, you may be treading thin ice. If your “independent contractor” commits a negligent act and a third party is injured, you can be held liable. The problem with this area of law is that it does not matter whether you thought the individual was an independent contractor or an employee.
Pitfall #4: Failure to Maintain Adequate Insurance
Don’t be cheap. Insurance will protect you in most circumstances. If you keep the minimum insurance, increase the liability limits. Insurance also gives you an attorney in an event you are sued, even if the claim is settled before trial. The duty of an insurer to defend (pay for your lawyer) is much broader than its duty to indemnify (pay for claims against you). Even if the lawsuit is completely bogus, the insurance company will provide you with a lawyer, saving you thousands of dollars.
Pitfall #5: Failure to “Get it in Writing”
Always leave a paper trail. Whenever you speak with someone at a company, the IRS or any governmental organization, get it in writing. If they won’t give it to you in writing, send them a “self–serving” follow–up letter summarizing your conversation. Their failure to object to its contents may be deemed an admission of what the letter states. Keep a copy in your file in case to have to prove the oral conversation in court.
Remember, it’s not what happens, it’s what you can prove in court (also known as the “O.J. Rule”)! The written word is your most powerful weapon in Court – use it.
