3 Critical Tools for Protecting Small Business Owners from Frivolous Lawsuits

Business.com / Legal / Last Modified: February 22, 2017

Three ways you can safeguard your startup from law suits that drain productivity out of your business.

There are few things that scare me more as an entrepreneur than the hassle and potential costs of being served with a notice of a lawsuit.

We’ve all joked about the guy that’s set for life because he slipped on a wet floor at Home Depot and sued the mega-chain for millions.

But, for a small business, a lawsuit (frivolous or justified) could wipe out all of the hard-earned progress made toward building a company that can provide for you and your loved ones.

Just to make sure I don’t invite something that this article is designed to prevent; I’ll issue my standard disclaimer. I am not an attorney.

I am a passionate entrepreneur that enjoys providing my limited, hard-earned knowledge to others on the internet also pursuing the dream. The opinions expressed in this article are my own, and I make no claim that they are legally correct in your specific situation.

Alright, nobody’s gonna sue me, right? Great! So, let’s dig into a couple areas where you can help protect your small business from frivolous lawsuits.

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1. Create a Limited Liability Corporation (LLC)

This option is the most popular, because the airwaves and Internet are plastered with ads encouraging entrepreneurs to incorporate themselves; whether that’s an S-Corp, C-Corp or Limited Liability Corporation. The pros and cons of each type of company formation have already been discussed at length in other articles, so I won’t rehash them here.

Consulting a tax attorney and CPA is a wise decision for any entrepreneur. There are a variety of tax scenarios that can be less costly if you incorporate. Of course, situations change, so bringing in professional advisors with experience is recommended.

But, if you fail to hide your personal assets behind the legal shield of something like an LLC, you’re leaving all of your assets much more vulnerable to potential legal judgments against you and your business. Don’t let an unexpected court judgment take away your home and other belongings.

2. Communicate Clearly

When discussing or processing transactions, communicate clearly with your clients, employees, suppliers and vendors. Clear, written communication is always best. Email and text messages can sometimes be used in court to prove or disprove claims made against you and your business.

Related Article:Overdue & Over You: What Actions Can You Take When a Client Hasn’t Paid?

Clear communication is about more than avoiding lawsuits. According to an article published on AZ Central, “…46 percent [of employees] said they routinely received confusing or unclear directions, with 36 percent of these employees reporting it happening up to three times each day.” Despite our best efforts, misunderstandings happen. Let’s resolve to do everything we can to simplify the way we do business, while communicating clearly with those around us.

3. Have Customers Sign a Release of Liability

Businesses come in all shapes and sizes. Chances are, there’s a potential for your product or service to inadvertently cause harm to an individual. Babies will swallow small objects. Customers in a store will slip and fall. People will take your advice out of context.

A Release of Liability is a document that, when properly written and signed, transfers the liability for taking part in an activity away from the facilitator, transferring it to the participant (or individual signing the form). I had the opportunity to speak about the power of an RoL with Brandon Fulgham, an attorney in Fort Worth. He stated:

“An RoL is a great tool for reducing liability, but business owners shouldn’t think of it as a total legal shield. There are circumstances where a fully executed RoL can be neutralized in legal proceedings. For example, a bar owner would have a hard time enforcing an RoL in court if they have patrons sign the document after becoming intoxicated.”

There’s no such thing as a complete guarantee that a lawsuit will never be filed against you or your company. But, properly forming your company and protecting your assets, using written, clear communication and having clients sign a RoL are all great steps towards protecting yourself from the hassle of a lawsuit that drains all energy out of your business.

Related Article:Protect Yourself: How to Setup a Form Contract to Prevent Legal Complications Later

It's up to you to treat people fairly and honestly and practice sound judgment while running your business. Lawsuits do happen to good people, but the fallout from legal proceedings can be minimized by following these three steps.

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