I am the owner of a small business and a real estate investor. Although my businesses are profitable, I simply cannot risk a frivolous — and potentially ruinous — lawsuit. What steps can my businesses take that will keep them from being dragged through the court system?
As the saying goes, “anyone can sue anyone else, at anytime, for anything.” It is often little comfort for the owners of a business to have their lawyer tell them that frivolous lawsuits can usually be resolved relatively quickly and with relatively little expense. So here are the top 10 tips for keeping small (and not-so-small) businesses and real estate investors out of court:
1. Use the Proper Legal Entity for Your Business and Make Sure it is Set-up Properly.
Not all business entities are created equal. Furthermore, the structures within each type of business entity are also not created equal. So regardless of whether your business would be best-served through use of a corporation, limited liability company (LLC), or some form of partnership, be sure you obtain competent legal advice in selecting and setting-up the legal entity through which your business will operate.
2. Keep Proper Records
Everyone knows (or should know) that it is extremely important to keep records for business tax purposes. It is also important to keep records in the ordinary course of business that are unrelated to taxes. Although the type and nature of such records will depend on the type and nature of the business, suffice it to say that there are few (very few) businesses that cannot manage or reduce its exposure litigation risk by keeping proper records.
3. Implement and Maintain Appropriate Data Security Procedures
We live in a digital and data-driven world. Digital evidence is an ever-present and ever-growing component of business-related litigation, both for plaintiff and defense. Don’t lose the litigation battle over data by default.
4. Use Independent Contractors Appropriately
Savvy business owners have long understood that one way to increase profits is to decrease expenses, and that one very profitable way to decrease expenses is to use independent contractors instead of employees. While there are many advantages to using independent contractors, there are many more disadvantages if it is not done correctly. Make sure you use independent contractors properly.
5. Implement and Administer Appropriate Employee Policies and Procedures
If your business does require employees, make sure appropriate employee policies and procedures are in place to facilitate a good employer-employee experience for all involved. Not only is it the right thing to do, it also makes good business sense to do so.
6. Adopt and Maintain Appropriate Customer/Client Controls
Just as a business should properly manage its independent contractors and employees, it should also properly maintain proper customer/client controls. Proper customer/client controls include such matters as ensuring reasonable expectations, such as through the use of written contracts, policies and other business and industry-specific controls.
7. Adopt and Maintain Appropriate Vendor Controls
Vendors must also be managed. Just as appropriate controls should be implemented to prevent or reduce the magnitude of legal disputes between workers and customers, so too should appropriate controls be used to reduce the likelihood and magnitude of disputes with vendors. This, too, is a business/industry-specific analysis.
8. Use Business Experiences to Continually “Fine-Tune” Your Business Practices
Simply put: learn from your mistakes. After your business experiences and works through a problem, make appropriate changes to your business controls so that the likelihood of that same problem being repeated is reduced, if not eliminated altogether.
9. Purchase and Maintain Appropriate Types and Amounts of Insurance
Insurance is cheap, compared to most risks. Lawsuits can often be settled before trial for an amount equal to or less than the “policy limits” of the defendant’s insurance policy. However, if the defendant is uninsured — or under insured — well, enough said about that.
10. Engage in Appropriate Asset Protection Planning Before a Lawsuit Is on the Horizon
Lastly, there are many legal strategies that can be implemented prior to the threat of a lawsuit that will either discourage the plaintiff from suing in the first place or, if the plaintiff does sue, provide the defendant with legal tools to terminate the lawsuit, before the lawsuit gets too out-of-control. Many of these asset protection planning tools, however, are either unavailable after a claim arises, or will be of reduced effectiveness after a claim has arisen.
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