How to Not Get Sued: Protecting Your Small Business Against Lawsuits

Ben Allen  | 

Ordinary individuals rarely have to deal with the threat of a lawsuit. Unfortunately, the risk is different for small business owners.

The reality faced by entrepreneurs is that lawsuits — or at least the threat of a lawsuit — is almost inevitable. It isn’t just “bad guys” or dishonest companies receiving legal summons or facing fines and penalties. From accidental injuries to disgruntled employees, and intellectual property attorneys to governmental agencies, there are always countless sources of potential lawsuits threatening each and every small business.

As a business owner, you also face a much higher risk of getting sued. Since you are actively providing a service or product to other people, the chances of customers, competitors, or regulators deciding to come after you with a lawsuit increases. Whether or not you have broken a law or caused harm (directly or indirectly), you can expect a lawsuit.

Because lawsuits against businesses and entrepreneurs are so common, you need to be properly protected almost as soon as you start your company. Here are some things you need to be doing to help protect yourself.

Know the Common Causes for Lawsuits

Every lawsuit is unique, but there are some general types of lawsuits that are common for businesses and entrepreneurs to face. While it’s impossible to plan for every specific eventuality, knowing and preventing the most common lawsuits can go a long way to keep your doors open and your assets intact.

Employees

The most common source of business lawsuits are your employees. Typically, these lawsuits stem from things like discrimination, wrongful termination, or wage/hours work violations. As employees feel slighted by their company, they turn to a lawsuit to get compensation for damages the business caused.

Customers

Customers can be another source of lawsuits, especially in a B2C business. If you ever sell defective products that result in injuries of customers, you can expect lawsuits coming your way. If you sell a service and a customer believes that you have broken your contract to them, they might hit you with a lawsuit. Keep in mind: you can be accused of these things whether or not they actually happened.

Sometimes a person will bring or threaten a suit in the hopes that you’ll agree to settle out of court, paying a settlement up front to avoid a long and expensive legal battle. Planning ahead and protecting yourself can also help avoid these out of court settlements.

Intellectual Property Claims

Finally, other businesses and entrepreneurs might feel you have stolen their ideas or products. Copyright and intellectual property rights lawsuits can happen when you either haven’t paid or properly credited somebody when using their work. This can occur if you accidentally violate a patent, or have a very similar type of business.

Rarely do individuals get sued, but the business as the whole. That means that if the lawsuit is successful, the claimant receives money only from the business, not its employees or owners. Even if the lawsuit is because of a specific employee, if it involves the company, it’s likely the company getting sued.

Hire an Attorney

When your company gets hit with a lawsuit, the first step needs to be hiring an attorney. Before any kind of statement, retaliation, or complaining happens, you need to have the right legal advice at your side. That way, through the lawsuit process, a lawyer can guide you on the best route to take and make sure you don’t dig yourself into a deeper hole.

But it’s also a smart idea to hire a lawyer before the lawsuits come pouring in. An attorney practiced in business law can help prevent future lawsuits and make sure your business is protected. Having a lawyer you can have look over contracts, business plans, marketing materials and such can help avoid future problems. Consider the rate for having an attorney on retainer the next time you look at your budget to see if having regular access to one is possible.

Acquire Business Insurance

Running a business comes with risk. While having the right policies and procedures in place can go a long way to lowering that risk, it is always there. Bad things can happen and the blame can fall to your business for them. If you received a business loan to start your company and are still paying it off, it’s likely you already have business insurance as a requirement from the lender.

Business insurance is there for when the unthinkable happens. Having the right business insurance for the right scenario can help prevent lawsuits by making sure people don’t have a financial motivation to sue your business.

General liability insurance can protect your business from a host of things, ranging from worker compensation to lawsuits. If a worker gets hurt on company time and you have the means to pay for their worker comp, it’s unlikely they will pursue a lawsuit. But, if you do get sued, business insurance can help with the costs accrued during a lawsuit and, if you lose, help pay for the settlement.

Prevent Employee Lawsuits

Discrimination, wrongful termination, and not complying to proper pay laws are all reasons why your employees might want to sue you. Keeping your company compliant to all of this and making sure your employees are happy are the best ways to prevent lawsuits.

If your company is large enough, an HR department can do a lot to make sure the needs of your employees are met. They can make sure things like employee discrimination and employee wages are compliant with legal standards.

If you don’t have an HR department, it becomes doubly important to have strong standards and guidelines for you business. These standards need to be accessible to all of your employees and need to address everything concerning their job. This includes things like: steps for termination, benefits, raises, dress standards, safety protocols, and such.

Protect Your Customers

If a customer trusts you with their personal information, it becomes your job to keep it safe. If a customer’s identity or credit card is stolen, and it is tracked back that it was your fault, you are liable for damages.

Make sure both your employees know how to keep your company’s data secured and that you have the latest in data security software.

Lawsuits can come from any direction and being prepared can go a long way in preventing. If you take care of your employees and do your diligence with customers, your business can stay relatively free of lawsuits. Protect your business at all costs and don’t let a simple mistake cost you big.

For more tips and guides, visit our small business resource center.


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Ben Allen is a freelance content creator and digital marketer who believes in helping small businesses succeed. He spends his free time bragging about his two daughters, eating stuffed crust pizza, and playing video games.

This post was updated December 7, 2017. It was originally published November 19, 2017.