Published February 2006

Tips to protect your
business from lawsuits

Dear BizBest: Whenever I see a fellow business owner, it seems they are being sued for one reason or another. Lawsuits are getting out of hand, and small businesses are suffering. I’m worried I could be next. What can I do? — Worried

Dear Worried: You’re wise to be worried. The road to entrepreneurship is filled with legal potholes.

“With the dramatic rise in the cost of lawsuits, many small businesses fear even the possibility of being sued,” says Elizabeth Gaudio, senior attorney with the National Federation of Independent Business Legal Foundation.

A new study by the NFIB — America’s largest small-business advocacy group — found that the median cost to settle a legal dispute for a small business is about $5,000.

“Considering that the average small-business owner’s salary is less than $50,000 a year, it’s easy to understand the economic pressures to settle,” adds Jack Faris, president of NFIB. “Business owners say being sued is one of the most threatening experiences they encounter — especially for the smallest firms that could be put out of business by one frivolous lawsuit.”

Don’t just hope legal troubles will pass you by. Develop a strategy to ward them off. Here are some tips on how to do that from Gaudio of the NFIB Legal Foundation:

  • Go corporate. By incorporating your business, you can protect personal assets and limit any liability to your business assets. Make sure you follow corporate procedures and have an attorney or accountant review your records yearly.
  • Know the law. Ignorance of the law is no defense, and a good way to get into legal trouble. Focus on these areas: employment law, health and safety law, tax law and environmental law. Make sure employees are well trained and aware of discrimination laws.
  • Insure yourself. Make sure your business insurance covers you in all situations. If your insurance does not cover a claim, the injured party may go after your personal or unincorporated assets. Coverage may be available through an umbrella policy and Employment Practices Liability Insurance.
  • Manage fairly and wisely. Try to make good hiring decisions from the start. Interview thoroughly but fairly. All applicants should be treated equally and asked the same questions. Set clear expectations with new hires by providing a written job description and the company’s code of conduct. Provide written policies stating that discrimination and harassment will not be tolerated. Tackle problems early and enforce policies consistently with each employee.
  • Classify employees correctly. Many recent lawsuits have alleged misclassification of consultants and salaried “exempt” employees under the Fair Labor Standards Act. This can cause disputes involving overtime pay and tax withholding. Be particularly cautious not to incorrectly classify an employee as an independent contractor.
  • Watch out for workers’ comp claims. Stop workplace accidents before they happen. Implement proactive training procedures and a written safety plan. Report claims immediately — waiting even a week causes settlement costs to soar.
  • Document, document, document. Writing and keeping documents is vital. Create a document retention policy that everyone must follow.

These resources can help in your quest to stay out of court:

  • The American Arbitration Association is a not-for-profit organization with offices nationwide offering dispute resolution services as an alternative to going to court. Visit
  • The NFIB Legal Foundation ( offers excellent legal defense tools for small business, available free online.
  • The Small Business & Self Employment section of the IRS Web site describes the federal tax agency’s rules on independent contractors. Visit
  • The HR Answer Book by Shawn Smith and Rebecca Mazin (AMACOM Books; $24.95) offers expert Q&A style advice on key legal issues involving employees. Visit
  • The U.S. Small Business Administration Web site has helpful advice on writing job descriptions, the interview process and other topics. Visit the “Managing Employees” section at

Daniel Kehrer ( is founder of BizBest (, which publishes “The 100 Best Resources for Small Business.”

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